Spotlight Exclusives

Reform the EITC to Better Serve our Nation۪s Low Income Workers

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Over ten years ago we moved from a national system that rewarded welfare to one that supported work. The key policy shift involved government aligning its resources with the value of work that we as Americans had always advocated. A key element in ending welfare as we then knew it, the Earned Income Tax Credit, is the most critical part of this work support program. The EITC produces approximately $43 billion annually for low-income workers, most of whom are single women. Yet despite the enormity of the program, neither taxpayers nor low-income families are served as well by the EITC as they should be.

The program suffers from design flaws, errors, and mismanagement.

During reform efforts by the Internal Revenue Service, which runs the program, we learned that about 25 percent of the EITC payments are made in error, accounting for more than $10 billion in improper spending. This error rate far exceeds the rates of other programs, such as the Food Stamp program (5.8 percent) or Medicare (4.4 percent). This high error rate means that government is making payments to people who do not qualify for them or is providing beneficiaries with the wrong level of support. We should expect more from the nation۪s largest pro-work assistance program.

Complex rules complicate efforts to help the EITC benefit more families who legitimately need it and to crack down on the waste, fraud, and abuse. More fundamentally, though, the structure of the program and its placement inside the Internal Revenue Service contribute significantly to the program۪s problems. The program۪s requirements regarding who qualifies as a child, the filing status of taxpayers, and what income must be reported all contribute to needless errors. Simplifying the program by making its requirements clearer would help, but in my view, it would not be enough. We need to consider how to reform the fundamental precepts of the program and the role of the IRS.

The IRS is designed to collect taxes from individuals and corporations, especially those not fully paying what they owe. It is not designed to administer a redistribution program such as the EITC. The National Commission on Restructuring the IRS heard from numerous IRS officials about the difficulties they face in trying to effectively run the EITC. The design of the program not only diverts the attention of the IRS but negatively affects many of the truly deserving beneficiaries who need the supplement for food, transportation and child care during the year, not when it is over.

Instead of existing as a tax credit that individuals must file with the IRS at the end of the year, the EITC should instead be incorporated into the payroll tax, so that each month those who earn below certain levels would not pay a portion of their federal, Social Security, and Medicare taxes. Workers would experience a boost in their level of take home pay as they work, not after they file their tax returns with the IRS. This change would simplify the process by eliminating the role the IRS currently plays, and it would increase the number of families who benefit from the program, since many currently do not receive their benefit due to the complex and bureaucratic rules they have to meet. It would also eliminate much of the fraud that currently exists in the credit claiming process. The main challenge for policymakers in implementing such a policy would be to carefully design program rules to ensure that a worker۪s boost in pay or job change does not result in miscalculations of the benefit.

The most important effect of reforming the EITC along these lines is that it would fulfill the original intent of the program: to reward low-income families who get up every day and go to work but who do not earn enough to get ahead. Fostering such an ownership society that rewards personal responsibility and puts money in the pockets of workers as they earn it will require rethinking the design and administration of the Earned Income Tax Credit.

Stephen Goldsmith is former Mayor of Indianapolis and currently Daniel Paul Professor of Government and Director of the Innovations in American Government Program at Harvard۪s Kennedy School of Government.

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