Imagine for a moment a pile of cash. It’s meant for a specific group of people, only they don’t know that it’s there — and theirs for the taking. The seemingly obvious fix, which is to tell them, doesn’t work.
What to do now?
That’s the policy conundrum facing one of the largest anti-poverty programs in the United States: The earned income tax credit (EITC). Created in 1975 as part of the Internal Revenue Code, the benefit gives low-income workers a credit on their taxes, depending on their specific circumstances. About 5 million people, or 20 percent of all eligible claimants, fail to take the benefit, leaving an estimated $7 billion a year on the table.
That’s a big deal given that the EITC has been shown to help keep families out of poverty. Without it, the number of children growing up poor would be 25 percent greater, according to the Center on Budget and Policy Priorities.
In response, governments and non-profits every year spend millions of dollars spreading the word about the EITC in the hopes of boosting uptake. There’s even an official “EITC Awareness Day.”
Informational outreach makes intuitive sense, but there’s one hitch: It’s not working.
“Lots of people who are eligible to claim the EITC miss it every year and this has remained the case despite years of policy efforts to address the problem,” says Jacob Goldin
, a faculty fellow at the Stanford Institute for Economic Policy Research (SIEPR) and associate professor at Stanford Law School.
Goldin is among a group of scholars at Stanford and elsewhere who are studying different approaches to increase EITC participation. In a working paper
published recently through the National Bureau of Economic Research, Goldin and his co-authors — Tatiana Homonoff, Rizwan Javaid, and Brenda Schafer — provide evidence that getting more people to file tax returns in the first place is all it would take to help the missing 5 million collect the credit.
Their study analyzed an IRS initiative to get low-income workers who didn’t file a return for the 2017 tax year to do so for 2018. For the experiment, the government sent 56,000 letters to households describing the availability of free tax preparation assistance. While the outreach only modestly increased filing, 43 percent of the new filers claimed the EITC for an average credit of $861. For 80 percent of the new filers, the credit and other provisions resulted in a tax refund.
“Our research suggests that a promising way to get eligible people to claim the EITC is to get them to file tax returns in the first place,” Goldin says. Co-author Homonoff is an assistant professor of economics and public service at New York University. Javaid and Schafer work in the research, applied analytics, and statistics division at the Internal Revenue Service.
A world of information overload
Their study comes at a time when poverty rates in the U.S. — and the role of tax policies as a way of reducing them — are once again a top concern. Millions of people have lost jobs and income because of the COVID-19 pandemic, and the economic fallout is generating a number of policy responses. On top of a second stimulus package, President Joe Biden is proposing changes to the tax code, including a temporary expansion of the EITC for some workers.
The stimulus checks are one example of how income-supported social welfare programs increasingly are administered through the tax code. Goldin expects that stimulus checks will have the unintended benefit of increasing filings, which will in turn drive up EITC claims.
“By making it more appealing for those who need to file a tax return to do so, you draw in more people who are eligible for the EITC,” he says.
It's a perfect example, Goldin says, for why filing rates are so important to government efforts to reduce poverty. The vast majority of taxpayers today get assistance filling out their tax returns, either through professionals, free services, or commercial software. These resources can identify who is eligible for the EITC and claim it on a return. Taxpayers don’t need to know about the credit or any other benefit available to them. They just need to hand over their relevant information.
“Existing policies aimed at educating about the EITC are really based on a world that doesn’t exist anymore,” Goldin says, “where people would fill out tax returns by paper and pencil and leaf through instruction booklets.”
A separate study
co-authored by Goldin has found that laws requiring employers to notify workers about the credit are also ineffective. Goldin also detailed the problem of EITC uptake in a 2018 Tax Law Review
The other challenge with educational outreach, says Goldin, is that people these days are overloaded with information. “Trying to understand the EITC becomes too hard and too complex,” he says.
Modest uptick, big results
Incentivizing more people to file tax returns isn’t foolproof, according to Goldin. One of the goals behind the EITC, for example, has always been to help motivate people to find jobs. If they don’t know about the EITC — in part because they don’t need to when using tax preparation services — that rationale goes away.
Moreover, there are many reasons why people don’t file tax returns. Although about 70 percent of taxpayers are eligible for free preparation services, surprisingly few take advantage of them. Costs, both in actual fees and perceptions of the hassles involved, are a main reason why people don’t file. Then, too, there are non-filers who think they owe money. “The financial payoff is too uncertain,” Goldin says.
Even the IRS experiment at the heart of Goldin’s study had only modest impact. Although the agency’s letter described free services either in person or online, filing rates increased only 3.5 percent. The researchers also looked at what happened in the following year, when no letters were sent to the study group, and found no evidence that the increase in 2018 tax filings carried over into the 2019 tax year.
To Goldin, this is another sign that filing taxes isn’t top of mind for some people, whether they know about the EITC or not. They need to be nudged, even if it means every year.
“The intervention we studied turned out not to be a silver bullet,” Homonoff says. “Even so, our findings suggest that reducing barriers to filing — by simplifying the process or by expanding the benefits available — may be the best way to get people to claim the EITC and, indirectly, help to reduce poverty.”
And if more people are filing tax returns and claiming the EITC as a result, adds Goldin, they are likely benefiting from other tax provisions they don’t know about. To that end, taxpayers who didn’t file in 2017, but did the following year after receiving the IRS letter received on average a $2,000 refund, more than twice their average EITC credit alone.