47 Pages Posted: 26 Apr 2006
This article analyzes the government's increased use of the tax system to deliver benefits to the working poor. The hybrid in this article is the earned income tax credit (EITC), one of the country's largest anti-poverty programs. The EITC is hybrid in that it is administered in the tax system but is increasingly redistributive, like traditional welfare programs. It reveals that the hybrid tax and welfare nature of the delivery of benefits to the working poor through the tax system results in some significant benefits, such as higher participation and lower administrative costs, but also a weakness in the form of increased errors and fraud. With the EITC's error rate up to five times as high as other benefits' programs, the IRS has undertaken radical efforts at reducing error, efforts that are alien to the tax system, like precertifying eligibility before receipt of a tax benefit, and indefinite freezes of refunds without sufficient notice or hearing that are alien to traditional due process protections. The backfire risk is that the continued high error rates will weaken support for the EITC, and threaten its continued existence.
The article provides a framework for the government to reduce errors through shifting additional costs to third parties, as well as to reduce the incentives for individuals themselves to attempt to game the system and cheat. The article builds on my prior scholarship that integrated a sociological typology of noncompliance, and continues with my focus on presenting policymakers with an opportunity to evaluate efforts to reduce errors based upon an understanding as to what drives cheating and errors in the tax system.
The EITC's hybrid status in and of itself does not reveal policy options to reduce cheating or error; rather, the unique characteristics of the tax system's eligibility and delivery process present opportunities to reduce error and eliminate cheating without eliminating the EITC's low administrative cost and high participation benefits. In particular, the government should impose additional costs on return preparers, third parties that benefit from the EITC's placement in the tax system. In addition, the article reveals how reducing structural incentives for taxpayers themselves to game the system can materially reduce error rates without sacrificing other policy goals.
Keywords: tax compliance, earned income tax credit, return preparer, poverty law
Suggested Citation: Suggested Citation
Book, Leslie, Preventing the Hybrid from Backfiring: Delivery of Benefits to the Working Poor through the Tax System. Wisconsin Law Review, No. 4, 2006; Villanova Law/Public Policy Research Paper No. 2006-7. Available at SSRN: https://ssrn.com/abstract=898918