Tuesday, March 20, 2018
Jacob Goldin (Stanford) presents Tax Benefit Complexity and Take-Up of the Earned Income Tax Credit at Georgetown today as part of its Tax Law and Public Finance Workshop Series hosted by Lilian Faulhaber and Itai Grinberg:
Tax benefits like the Earned Income Tax Credit (EITC) represent an important source of income to their recipients, but millions of those who are eligible to claim tax benefits fail to do so. One possible explanation is that the rules governing most tax benefits are extraordinarily complex. I consider efforts to increase tax benefit take-up in light of this complexity. A key fact in thinking about this issue is that the vast majority of tax filers today prepare their taxes with assisted preparation methods (APMs) like software or professional assistance. Because APMs eliminate most of the barriers to claiming tax benefits for which one is eligible, I ague that efforts to increase benefit take-up should focus on inducing benefit-eligible individuals to file a tax return using an APM. In contrast, efforts aimed at increasing awareness of a benefit (of the type widely employed by governments and nonprofits) are less likely to be successful, except to the extent they themselves induce an increase in tax filing.
Tax reforms that appear unrelated to the benefit may dramatically affect benefit take-up rates by altering tax filing incentives. I illustrate these arguments in the context of the EITC, drawing on new statistics and recent empirical work to support my claims.