The EITC and the Decade of "Welfare Reform"

-- Bradford DeLong (delong@econ.berkeley.edu), May 04, 2000

Answers

The last time I talked to the IRS people, they said that the "error" rate for EITC-including returns was significantly lower than the "error" rate for, say, returns with capital gains. And that most of the errors were not fraud but simply that people found the forms ambiguous...

But I agree that the IRS is not an agency that can focus on tightly monitoring and enforcing the EITC...

-- Bradford DeLong (delong@econ.berkeley.edu), May 04, 2000.

A few points:

(1) From what I can see the main thing the states do spend money on, under TANF, is job search. An issue is whether the agency providing the program -- possibly a for-profit contractor -- is motivated to make the best match between person and job. John Donahue discussed how incentives for rapid placement defeated the stated purpose of JTPA in an old EPI report, as well as in his book.

(2) The findings about participation and effect on poverty rates are not original to C&S, but are cited in our paper.

(3) Also in the citation category, a key paper on the well- being of low-income single mothers post-reform is by Wendell Primus (on the Center for B&PP web site) [http://www.cbpp.org/.

(4) Compared to welfare programs, a tax credit is relatively unbureaucratic. Welfare applications used to be huge, though I understand they have been slimmed down in more recent years. Even so a tax credit is much more economical with respect to administration. Free help in filing for the credit is growing all the time. State and local govt officials are increasingly advertising the EITC and offering services to help people file for it. There are also non-profits involved.

http://www.state.nj.us/governor/news/p90401b.htm

(5) Note re: the push more people above the poverty line, lest we get carried away. If it isn't obvious, moving people over the line is not the same as filling the poverty gap. A program could fill a bigger part of the gap than EITC and move nobody 'over the line.'

(6) One relevant benefit of our proposal that you downplay is that we erase the distinction between EITC recipients and other taxpayers by putting them all under the same program. If you have children and don't exceed the interest/dividend income limits, you get a bigger credit, some of which could be cash. We turn the IRS into a huge Mr. Rogers.

(7) By the way, Cherry is first author.

-- Max Sawicky (sawicky@epinet.org), May 04, 2000.

In the early 1990's I prepared taxes for EITC recipients.

A big problem was seeming fraud. In particular, head of household filing status would be claimed when it was obviously not the case. Dependents were shifted around to help meet requirements, etc. Also, the level of earned income required to get a big credit seemed quite low.

An expansion of EITC would simply be an impetus for increased fraud schemes. Individuals are transferring enough wealth as it is, please leave OUR pocketbooks alone.

I can understand why your piece ran in a liberal publication like the New York Times.

Jim R. Virginia

-- J R (seesaw8@hotmail.com), May 04, 2000.

After reading your commentary on the welfare reform, I would like to add a few comments from a slightly different point of view.

First and foremost, I live in Newfoundland, Canada. We have at times had in the range of 25%+ unemployment, the highest in the country. With this we also have a fairly significant income and sales tax level (in most cases property tax is low or non-existent), but all in all taxes are relatively high for the individual (and family) compared to other provinces.

Secondly, I have seen the effects of "make work" projects on the population. The temporary influx of moneys is just that, temporary! Sure, I agree with government expenditure, that is if it is a well planned out investment in the community (Hoover Dam and Hibernia Oil Project) and not moving rock from point A to Point B.

Third, to reiterate what I have just said, well planned! Basically, there has been too many projects that have had great potential, but not planned out in a workable fashion. That is also in regards to the bureaucratic structure of the public (governmental) bodies. I have seen $26 million pumped into a greenhouse that supplied tomatoes and cucumbers to a market that didn't consume these, just to scratch the surface.

Also, on the topic of welfare reform, would it not be best to find out the root cause of the problem and not not the outcomes? To say, educate the people as they have done in Ireland for a low cost (or free)? To have the necessary infrastructure to have adequate health care as we do in Canada? Or to have family planning? These seem to be an expensive investment at first glance, but rather are quite cheap when you look at the net present value of the outcomes.

These are just some thoughts on the subject that you may wish to ponder. I would be only to glad to elaborate on anything here. I also have a friend, Kathy Bayliss, who is enrolled in the Phd. Economics program at Berkeley who would also be able to comment on much of the above.

-- Jason white (jason_darwin_white@yahoo.com), May 04, 2000.

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Your EITC note requires me to tell you of my dandy former son-in-law. Having at long last been required to pay some child support to my daughter, he now is suing her to be able to claim a child as a tax deduction--taking back with his left hand much of what he is required to give with his right...

I enjoy your page. Is Froomkin son of Joe Froomkin, Chicago PhD ca 1952? Re the new trade, I think the problems of the pharmaceutical industry my be pertinent. They have had legalized theft of intellectual property for years. But I haven't thought of that enough.

Paul W. Cook PhD Chicago 1952 (One of Milton's boys!)

-- Paul W. Cook (Paulwcook@aol.com), May 05, 2000.

Professor DeLong,

I agree that the EITC is an example of good tax policy. (I teach a Tax Policy course in the graduate tax program of a Philadelphia area law school.) The second criticism you mention is that the EITC "penalizes working-class two-earner families." You may wish to address this criticism more directly in a follow-up piece. The heart of it is, I think, that the EITC statute requires that "in the case of an individual who is married ... [the credit is available] only if a joint return is filed ... ." See Internal Revenue Code section 32(d).

The EITC tables, together with a comprehensive explanation of the provision, are published each year in IRS Publication 596, available for reading or download at the IRS web site. The tables permit ready comparison of the credit for single parent and two-parent working families with one or two children. The incentives for marriage or divorce provided by the credit in its current, section 32(d) form then may be evaluated in comparison with some other evident alternative, such as elimination of the section 32(d) requirement.

One might evaluate the different policies and perhaps speculate on their constituencies.

-- Cornelius C. Shields (cc_shields@msn.com), May 07, 2000.

I came across your Earned Income Tax Credit article (NY Times, May 4, 2000). Great work. You may want to refer to a Children Now Earned Income Tax Credit issue brief, scheduled for release on Wednesday, May 10, 2000 (available online: http://www.childrennow.org).

I am working on an after school/school-age issue brief and was wondering if you have come across Current Population Survey 1999 annual average and/or 1998 March supplement labor force participation data for California, other states (i.e.: number of families with children (0-17) with at least one parent in labor force by family type--single, married, etc.; number of children in families with at least one parent in labor force by family type -single, married, etc.; number of families with children living in poverty with at least one parent in labor force--single, married, etc.; number of children in families in poverty with at least one parent in labor force by family type -- single, married, etc.)...

Geovanny Fernandez Children Now 1212 Broadway 5th Floor Oakland, CA 94612 510-763-2444 ext. 118 (voice) 510-763-1974 (fax) gfernandez@childrennow.org (email)

-- Geovanny Fernandez (gfernandez@childrennow.org), May 13, 2000.