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Is the IRS Ready for a 'Tax War on Poverty'?

The Earned Income Tax Credit is now the biggest (and most popular) anti-poverty program in the country. But can the Internal Revenue Service handle an even bigger EITC?
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Cars drive past the Internal Revenue Service headquarters building. (Photo: Matthew Cavanaugh/Getty Images)

Cars drive past the Internal Revenue Service headquarters building. (Photo: Matthew Cavanaugh/Getty Images)

While Republicans and Democrats tend to disagree on most things related to combating poverty, both parties have found common ground on one measure: the Earned Income Tax Credit. The budget passed by Congress last December made permanent several extensions and improvements to both the EITC and the Child Tax Credit. (The provisions were temporarily instituted in the midst of the Great Recession and had been set to expire in 2017.) Robert Greenstein of the liberal Center on Budget and Policy Priorities wrote that "[m]aking the EITC and CTC improvements permanent would rank among the biggest anti-poverty achievements, outside of health reform, in years." It's no surprise, then, that both President Barack Obama and Paul Ryan have proposed further expanding the EITC to also cover childless workers. But is the Internal Revenue Service ready for what one researcher calls a "tax war on poverty"?

Over the past 25 years, there has been a dramatic change in the way the United States provides assistance to low-income families. The welfare reforms of 1996 imposed work requirements and time limits on the receipt of benefits, and gave states a great deal of latitude in program administration. As a result of the reforms, welfare caseloads and spending decreased dramatically. The EITC, on the other hand, has grown significantly—each of the last five presidents has expanded it while in office. In America today, approximately 50 million people (including 25 million children) receive federal benefits through the EITC or the CTC, and it's the biggest government cash transfer program for poor families with children.

"In the midst of the slow recovery from the Great Recession, the EITC is now the largest cash transfer program for low-income families with children," economist Hilary Hoynes wrote in a 2014 article. "The EITC cost roughly $59 billion in 2009."

The IRS wasn't created to fight poverty, and it's not equipped to administer social programs.

It seems everyone is in favor of the EITC. Policy wonks and economists like its simple, elegant design (and minimal bureaucratic requirements). Conservatives love that it incentivizes and rewards work—eligible recipients have to first earn income to receive the credit, and benefits increase as income increases, before eventually leveling off. The general public prefers programs like the EITC as well: Political scientists have found that both liberal and conservatives view government aid that's delivered through the tax code in a much more favorable light than direct spending programs like welfare or food stamps.

There's also little doubt that the EITC is an enormously effective anti-poverty program. Among other things, researchers have found that it increases the labor supply of single mothers, decreases the welfare caseloads, and improves children's health, education, and outcomes. From Hoynes' summary of the positive effects of the EITC:

[I]t has dramatically increased employment among single women with children; and it now removes more children from poverty than any other program. The effects of EITC extend well beyond simple income support and poverty reduction. By increasing the income of poor families, it generates additional spending and hence "downstream" economic effects. It leads to various improvements in the mental and physical health of mothers. It brings about a reduction in low birth weight among infants. And it improves the performance of children on cognitive tests.... And these benefits of EITC in turn accrue not only to the recipients themselves, but also indirectly to taxpayers who are relieved of the burden of subsidizing the health costs of those in poverty and who benefit from the burgeoning economy and growing tax rolls that the EITC brings about.

Perhaps the biggest problem with this new approach to fighting poverty is that it entirely bypasses those who can't find employment, those who are so marginalized that they file no tax returns and claim no income. The increasing focus on aid administered through the tax code is symptomatic of America's decision to, in Eduardo Porter's words, ignore the "poorest of the poor." But there's another, more prosaic, problem with the tax war The IRS wasn't created to fight poverty, and it's not equipped to administer social programs.

"One plus side of the IRS administering a benefit is that it's pretty low-cost, and the systems are in place," says Susannah Camic Tahk, a professor at the University of Wisconsin Law School who is studying the tax war on poverty. "But, on the other hand, sometimes, as a result of this pretty easy application process, benefits end up in the hands of the wrong folks. And the IRS doesn't have the expertise to help. Or recipients who are entitled to benefits don't get them. We don't have the giant administrative apparatus to help people who may have been incorrectly denied a benefit."

If someone runs into problems with their welfare or food stamp benefits, for example, they can seek help from the agency or from a low-income legal clinic, both of which have, for years, had systems set up to deal with such issues. But few such mechanisms exist for someone having problems with their EITC benefit. Should the IRS detect an error with a recipient's filing, the agency's first step is to freeze the refund and send a correspondence letter to the recipient seeking additional information or clarification. And 70 percent of those letters go unanswered—the recipients simply give up on ever collecting their EITC benefits, according to Michelle Drumbl, a lawyer who runs a poverty law clinic at Washington and Lee University.

"Folks who help low-income tax payers talk a lot about this," Tahk says. "Their clients get letters they don't understand from the IRS. The letters are confusing, they require documentation, people don't know what kind of documents are allowed, that kind of thing."

In response to these concerns, Congress has allocated funds to low-income taxpayer assistance clinics, but the effort is still in its early days. Tahk is about to begin a project that will research the needs of such clinics. "Part of my project is to understand what these clinics are doing," she says. "What are they doing that's good? What do they need more help or funding with? How might they help people assert their rights?"

The EITC is most certainly here to stay, which is a good thing for low-income workers, but its expansion needs to be accompanied by the resources to ensure that eligible recipients actually receive the benefit.