Despite growing polarization in Washington, one social program has managed to gain widespread support – the Earned Income Tax Credit (EITC). What started as a minor footnote to a 1975 tax bill has become one of the largest income transfers to the poor and near poor in the United States. It eliminates the federal income tax obligation and generates a tax refund for millions of households. By targeting low-wage workers, especially those with children, the EITC helps individuals who are widely seen as deserving. President Reagan was a fan of the EITC, as was President Clinton.
This book reminds us that even popular programs have their problems. The author, a specialist in tax law, documents several reasons why the EITC (and, to a lesser degree, the Child Tax Credit) fails to live up to its potential. Based partly on the experiences of New Zealand and Canada, she then recommends specific reforms. Some of her proposals are modest, such as distributing benefits quarterly rather than once a year. Other changes would be more substantial, such as tying benefits to household income but not marital status. One of the more interesting recommendations involves a clean separation between tax breaks for workers and for families with children. The author’s larger aim is to make good programs better, meaning more rational and coherent. Figuring out how, politically, to effect these changes is not her goal.
If any book ever illustrated the saying “the devil is in the details” it is this one. The level of detail is both a strength and a weakness. I was truly impressed with chapter 3, where the author identifies the main sources of improper payments in the EITC program. Many of the mistakes are unintended, which is not surprising given the complicated rules governing eligibility and benefits. And some mistakes are deliberate, committed by recipients or third-party tax preparers who wish to justify bigger refunds. The irony, as the author points out, is that these mistakes are rooted in a supposed virtue of the program – the lack of bureaucracy and administrative expense.
Likewise, the author does a good job of criticizing the practice of distributing tax refunds annually. This might seem like a small detail, but it makes a difference. Sociologists have found that recipients like getting one big check from the government. Recipients use their tax refunds to pay off sizable debts, replace old appliances, have their cars repaired, or buy their kids a special treat. For once, they feel like part of the middle class. Their debts, however, are often the product of high-interest credit cards and payday loans. If the EITC paid out benefits on a more regular basis, Drumbl argues, then the working poor might not have to borrow as much in the first place.
At other times, the author’s penchant for detail might limit the audience for this book. Given her background, we learn a lot about the difficulties taxpayers experience when dealing with the U.S. Tax Court. The book also includes extensive discussion of tax forms, eligibility criteria, and benefit levels. That information is certainly important for tax policy experts, but I suspect that most undergraduate or graduate students (outside of law school) will find it a bit overwhelming.
Although the author refers to very few studies from political science or public administration, this book does shed light on the concept of “administrative burden”. Pamela Herd, Donald Moynihan, and their co-authors have described the main components of administrative burden – learning costs, compliance costs, and psychological costs – and analysed the level of burden in a variety of government programs. They claim that the Earned Income Tax Credit imposes a relatively low burden on recipients, employers, and tax preparers. Drumbl’s book, however, suggests that those burdens have been underestimated, especially for individuals who are audited by the Internal Revenue Service or who find themselves in Tax Court.
My hunch is that it will be difficult to make the EITC as rational and coherent as Professor Drumbl wants. A large part of the program’s political appeal is its ambiguity. Originally, the EITC was embraced because it helped offset regressive payroll taxes. Some supporters have called it a work incentive; they believe that poor people need more motivation to find employment. Others see it as a work subsidy that helps motivated individuals survive in low-wage jobs. Since the 1980s, Democratic and Republican officials have embraced the EITC (and later the Child Tax Credit) as pro-family policies. In an era when common ground is hard to find, it helps to have a program with multiple objectives. This is one reason why the program has escaped cutbacks, despite rising deficits and changes in partisan control of government. As this book demonstrates, the price of such ambiguity is paid later, away from the headlines, by individuals trying to cope with compromises embedded in the tax code.
