EITC Awareness Day

 
 
January 28, 2013

Friday was IRS’s Earned Income Tax Credit (EITC) Awareness Day. From their website:

EITC Awareness Day is a one-day blitz - in mainstream and social media -to reach the broadest possible range of potentially-eligible taxpayers, including taxpayer segments we believe under claim EITC and newly eligible taxpayers.

Four out of five people claim and get the EITC they earned but that leaves millions of people who miss boosting their income by claiming EITC. We need to work hard to reach the members of your community who are eligible for EITC but don't file because their income is below the filing requirement and for those new to EITC each year.

According to the IRS, more than 27 million people received this refundable tax credit in tax year 2011, costing more than $62 billion. It is one of the federal government’s largest anti-poverty programs, reducing many workers’ tax liability to zero or lower. This is a major contributor to the “nonpayer” phenomenon in the tax code, in which voters are largely disconnected from the cost of government.  Indeed, most of the budgetary cost of the EITC is from the refundable portion, meaning it leads to a negative income tax rate.

Research has shown that the EITC is associated with higher workforce participation among certain populations.  However, Casey Mulligan’s research shows there is no free lunch here, since the EITC creates disincentives to work over the income range in which it phases out (roughly $20,000 to $50,000).  And because the EITC is one of many overlapping anti-poverty programs, such as unemployment insurance, they all add up to huge disincentives to work among the poor.  Mulligan finds that the increasing generosity of these programs, especially since the 2009 American Recovery and Reinvestment Act, has led to a situation where roughly 4 million households face marginal tax rates approaching 100 percent.  That means they are better off not working.   Mulligan believes these policies explain much of the ongoing unemployment.

Whatever the merits of the EITC in theory, in practice it is a very complex program costing the government billions in erroneous payments, making it a major source of income tax fraud.  It seems likely to us that there is a connection between its complexity (a 60-page handbook), the erroneous payments and its relatively low uptake. Something a simple Awareness Day won’t fix.  Let’s hope for more awareness of the various costs of this program, rather than just the benefits.

Also check out our map of the percentage of EITC filers from each state in 2010.

Follow William McBride on Twitter @EconoWill

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