Reforming the Earned Income Tax Credit: A Fairer Way Forward
The Earned Income Tax Credit has provided tax relief and assistance for working families since being signed into law by President Gerald Ford in 1975 with bipartisan support in Congress. A decade later, with support from Democrats in Congress, President Ronald Reagan significantly expanded the program, calling it “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.” The Clinton Administration worked to further refine the initiative as well.
Every year since it began, the EITC has helped to meaningfully improve the lives of millions of working Americans. Unfortunately, as the program has expanded, so too has the opportunity to abuse it. Estimates vary, but experts inside and outside of government believe that billions of dollars are lost to unintended errors as well as deliberate attempts to bilk the system.
Many of the improper payments are no doubt the result of honest mistakes due to the complexity of the requirements to apply for the credit, which includes underpayments to otherwise eligible taxpayers. But most experts believe that many improper payments are the result of fraud and abuse. Government must address these issues head on, working to improve and innovate to reduce unintentional error and to slash intentional abuse and fraud. Government and industry should collaborate to develop the solutions to achieve these twin objectives. We must ensure that deserving taxpayers do not become collateral damage in the effort to reduce error and fraud.
As the largest provider of tax preparation software, we believe that technology can be at least part of the solution, applying behavioral economics and design based on actual taxpayer experience. Conversely, the proposed reform being advanced by some today would impose even greater complexity and more burdensome compliance requirements on the taxpayer. Their solution would assume that EITC applicants keep near-perfect records and documentation on most aspects of the daily lives of their families. That’s just not realistic – in theory or in practice.
We believe that public-private partnerships can utilize new technologies and apply innovative solutions to address error and abuse. We can study human behavior to help taxpayers more easily understand, comply with and complete the process. It can start with something as simple as using conversational language, which can reduce errors, increase understanding and help legitimate taxpayers provide more accurate and responsive answers to questions. We cannot lose sight of the taxpayer and the struggles they face in the real world as we strive for program improvement.
The tax code is already far too complex. As we have written here before, meaningful tax reform starts with tax simplification for the average taxpayer. Layering on additional complexity
access the EITC program is neither prudent policy nor will it work. In fact, we believe such a strategy would hurt the very people the program is intended to help.
Experience shows that creating additional layers of complexity will not deter those who are willing or determined to commit fraud. They just find new ways to commit a more sophisticated act of fraud. When well-meaning taxpayers applying for the EITC cannot understand what is being asked of them, it makes them more susceptible to being preyed upon by wily criminals for ill-gotten gain.
Honest people – the vast majority of American taxpayers – are already overwhelmed by the complexity of taxes and difficulty of understanding and compliance. These deserving taxpayers – our neighbors, friends, fellow members of the community – should not become casualties in the fight against error and abuse of the system.
We would be remiss if we didn’t also address some of the other arguments that distract –intentionally or not – from the important goal of genuinely reforming and improving the EITC in the public interest.
Some have suggested that tax preparation software, used by tens of millions of Americans, is the problem. In fact, it has been proven that more fraud is committed by the small number of unethical tax preparers than by the taxpaying citizens who file their own electronic returns. That fact, however, is no reason to dismiss concerns about those who would use software to abuse or defraud the system. Rather, it should be thoughtfully considered so that reformers can base their work on facts, not fiction.
Media reports also suggest that storefront tax interests are advocating for changes to the EITC program to make it harder for people to apply for the credit on their own and, consequently, push them to pay someone else to do it for them. However, whether there is such a separate motivation at work here is really beside the point. Taking steps to make the tax code more complex is just a bad idea and bad policy, when our tax system cries out for simplification reform.
The IRS Free File Program was created almost 15 years ago to serve low and middle income taxpayers, making tax preparation easy to understand and a consumer safety zone. This public-private partnership, which more than 20 states have joined, is provided at no cost to either the taxpayer using the service or to government budgets. The program was specifically created to provide a regulated alternative for eligible taxpayers to access programs like EITC without having to pay to file. It would not well serve the taxpayer, nor the tax system, to damage an important service like IRS Free File by adopting the kind of proposals now being advocated to add more burden and complexity to free self-preparation of EITC returns.
We welcome the opportunity to work with policymakers and tax administrators in both state and federal governments to find the most fair and workable solutions to this problem. After all, innovation and modern technology have simplified both the Voluntary Compliance process, and the burdens associated with it, and reduced the cost. That’s a track record that we think needs to continue, as should the bipartisan march toward desperately needed tax simplification reform for the average citizen.