TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, January 26, 2018

Weekly SSRN Tax Article Review And Roundup: Glogower Reviews Goldin's Tax Benefit Complexity And The EITC

This week, Ari Glogower (Ohio State) reviews a new work by Jacob Goldin (Stanford), Tax Benefit Complexity and Take-Up: Lessons from the Earned Income Tax Credit.

Glogower (2016)Jacob Goldin’s new work examines methods to increase taxpayer take-up of tax benefit programs such as the Earned Income Tax Credit (EITC). Although it is hard to determine the precise number of households that potentially qualify for the EITC, the IRS estimates that only around 80% of qualifying taxpayers claim the benefit, leaving a take-up gap of around 5 million households. The EITC significantly reduces poverty in the U.S., and therefore increasing take-up could direct more financial support to the taxpayers who can benefit from it the most.

The work considers the barriers that taxpayers face in claiming benefits such as the EITC, and the most effective ways to overcome these barriers. In short, Goldin argues that the government should focus on incentivizing taxpayers to file tax returns—and reducing filing costs—rather than increasing general awareness of the existence of specific tax benefit programs.

Why doesn’t everyone who qualifies claim the EITC?  Goldin focuses in particular on the complexity involved in claiming the benefit, and defines two distinct sources of complexity that might limit take-up. Informational complexity arises in gathering and reporting the necessary information to claim the benefit. Computational complexity, in contrast, arises in determining eligibility and the benefit amount based on the necessary information.

Goldin argues that, in the case of the EITC, the primary obstacle is computational—rather than informational—complexity. This is because much of the information necessary to calculate the EITC is already required for other purposes on the tax return. Determining EITC eligibility and calculating the actual benefit amount, however, is significantly more complex and requires multiple calculations on the basis of a number of interrelated factors.

As a result, Goldin concludes that government can most effectively increase take-up by encouraging taxpayers to file returns in the first place. In particular, the government should focus on increasing the real (or perceived) benefits of programs such as EITC, while minimizing the compliance complexity by encouraging the use of “assisted preparation methods” (“APMs”) such as tax filing software and professional assistance. In contrast, simply raising general awareness of the existence of programs such as the EITC is unlikely to significantly increase taxpayer take-up, since taxpayers may still be deterred by the costs of compliance, as well as uncertainty as to whether they will qualify and the amount of the potential benefit.

The work, though still in draft form, yields valuable insights for policymakers interested in maximizing the effect of critical financial support programs such as the EITC. The work also broadens the conversation in the literature on the proper role of different incentives to change taxpayer filing and reporting behavior. In a recent article, Leandra Lederman (Indiana) argued that effective enforcement and deterrence measures can increase tax compliance among taxpayers who would otherwise seek to avoid paying taxes, and does not crowd out voluntary compliance. Goldin’s work, in contrast, focuses on the other side of the equation, which is increasing compliance for the benefit of taxpayers, rather than for the benefit of the government. 

This basic distinction raises interesting questions. For example, it may be possible that some small subset of taxpayers who do not claim the EITC would prefer not to receive a net benefit from the government if it means filing a tax return.  What, if anything, should be done to change their mind? Stated differently, are all non-claimants necessarily acting irrationally and against their best interest?   

One of the many important corollaries of this work is the distributional aspects of unequal access to APMs.  Goldin notes the increasing prevalence of “free” tax preparation software, such as the service offered by Credit Karma.  These services undoubtedly lower the financial barriers to filing (for anyone with internet access) but entail a privacy cost, as filers are required to share their personal financial information with a third-party who may then monetize this data. At the same time, the tax return filing industry has famously quelled initiatives for free government-provided tax preparation services.  Goldin’s work highlights the potential cost of keeping tax preparation in private hands, and the effect of these costs on important financial support programs run through the tax code.

Here’s the rest of this week’s SSRN Tax Roundup:

http://taxprof.typepad.com/taxprof_blog/2018/01/weekly-ssrn-tax-article-review-and-roundup-glogower-reviews-goldins-complexity-and-the-eitc.html

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