What EITC Recipients Know about the Program — and What That Suggests about Reform

by Justus Myers

As labor-force participation continues to languish, low-income workers continue to struggle to make ends meet, and the minimum-wage debate heats up, it’s worth taking every possible opportunity to advance the conversation around pro-work and anti-poverty policies.

Too that end, a recent paper (gated, good summary here) provides some useful and fine-grained analysis of recipient perceptions of the Earned Income Tax Credit (EITC). Those insights, it turns out, provide tentative support for Marco Rubio’s skeletal but developing framework for replacing it with a direct wage subsidy.

Researchers Laura Tach and Sarah Halpern-Meekin’s recent paper provides some data relevant to the question. In the paper, Tax Code Knowledge and Behavioral Responses Among EITC Recipients: Policy Insights from Qualitative Data, the authors try to answer a basic question: How do recipients perceive and respond to the program? There is a large literature on aggregate behavioral responses to the EITC, but less understanding of why recipients behave the way they do, so Tach and Halpern-Meekin have conducted semi-structured interviews of 115 EITC recipients from around Boston.

What did they find? Almost all recipients knew about the EITC’s existence. Most (70 percent) had some sense that they received the credit because they did low-income work. Strikingly, only 38 percent understood that they also received the credit because they had children.

Although recipients could estimate their total federal tax refund, less than 10 percent knew what proportion of it came from the EITC.

Do recipients understand how their EITC benefit is determined? The researchers asked recipients to predict what would happen if they made more money, got married or divorced, or had an additional child. For predicted income increases, there was less confusion in the phase-in range ($8,050 or less) than in the phase-out range ($16,601 or more). About 64 percent of recipients in the phase-in range correctly predicted their refund would increase with more income, but only about 45 percent of recipients in the phase-out range correctly thought the refund would decrease with more income, and about 21 percent didn’t know.

These accuracy differences, the authors speculate, might partially explain the relatively strong employment effects of the EITC in the phase-in range compared to the phase-out range.

What about potential changes in marital status or having another kid? For changes in marital status, it was out of sight, out of mind. The authors found that “program participants did not think about the tax implications of marital status in large part because they were so far from getting married or divorced, which limited their understanding of, and responses to, the EITC’s (dis)incentives for marriage.” As for having more kids, most (76 percent) knew that it would increase the refund, even though they often incorrectly thought that the refund would increase at a flat rate with each additional child, when in fact it increases less for each additional child up to three and then stops increasing.

Of particular interest, the authors note, is that EITC recipients maximized refunds “in ways other than altering their labor supply and family behavior,” for example by claiming zero dependents (acting as a forced savings mechanism and minimizing the chances of a big tax hit at year’s end), among other strategies. Recipients often chose these strategies over changing their work behavior because their employment or family situation was so inflexible.

In theory, the EITC is a simple program. But in practice — and in particular from the vantage point of recipients — it’s opaque and complex. It’s almost surprising how much recipients did know about how their behavior related to the refund.

Nonetheless, large numbers of recipients were unsure of (or often incorrect about) how their behavior related to changes in the refund. Inadvertent noncompliance was also quite common — much more so than outright fraud, according to the authors, who noted “respondents freely volunteered their tax filing strategies to us, often unprompted and without embarrassment or evasion, sometimes even as a way of sharing advice they hoped would be helpful.”

Although the EITC is imperfect (see Jim Manzi on this front), it’s superior to a legally mandated minimum wage, which — notwithstanding historically low inflation-adjusted levels — is the wrong policy to emphasize when there are such outsized benefits to labor-force attachment.

But is there a better way? Although Tach and Halpern-Meekin recommend a few modest and worthwhile reforms (e.g. simplifying eligibility criteria), we could take a further step and replace the EITC with a much simpler direct wage subsidy via a reverse payroll tax, per Oren Cass’s proposal in National Review (which is gated — here is a useful interview describing most aspects of the proposal). The incentives of such a program would be easily perceived in each paycheck, distinguishing it from other annual tax refunds and sources of income support.

That said, we shouldn’t cavalierly reform or replace the EITC. Initiated as a modest tax credit in 1975 to offset Social Security payroll taxes and encourage work, the EITC has moved from an academic exercise — famously advocated by Milton Friedman — to surpassing Temporary Assistance for Needy Families (TANF) in size and impact on poverty. That is a remarkable policy achievement. But we can improve on it and indeed we should try.