Wednesday, February 27, 2019
Kathleen DeLaney Thomas (North Carolina), Increasing EITC Take-Up in the Age of TurboTax, (JOTWELL) (reviewing Jacob Goldin (Stanford), Tax Benefit Complexity and Take-Up: Lessons From the Earned Income-Tax Credit (reviewed by Ari Glogower (Ohio State) here)):
One dilemma for policymakers is how to get people to take advantage of social welfare programs. In the case of the Earned Income Tax Credit (“EITC”), the goal is to encourage eligible individuals to claim the credit on their tax return. Take-up rates for the EITC are quite good (about 80% overall), but ideally would be higher. Typically the approach to increasing EITC take-up is information campaigns, like EITC awareness day. The conventional wisdom has been that the more people know about the EITC, the more likely eligible recipients are to claim it. But is it right that advance notice is important? If people use tax software that will automatically calculate the EITC for them, how important is it that they are made aware of the benefit ahead of time? Perhaps not very, as suggested by Jacob Goldin in his forthcoming article, Tax Benefit Complexity and Take-up: Lessons from the Earned Income Tax Credit.
The key insight from Goldin’s article is that in the modern age, virtually anyone who files a tax return is presented with the opportunity to claim the EITC. This is because the vast majority of taxpayers—96 percent in 2015 according to Goldin—use assisted preparation methods (“APMs”) such as self-preparation software or a tax return preparer. Using either of those methods, it is extremely unlikely to fail to claim the credit accidentally. (Though, as Goldin notes, some taxpayers may consciously choose not to claim the credit even though they are eligible.) The paper’s main conclusion is logical yet important: people who are eligible for the EITC but who fail to claim it are generally people who fail to file returns at all. Thus, if policymakers want to increase EITC take-up, they must increase the filing rate.
Increasing EITC take-up by increasing awareness of the credit itself made sense in previous decades. As Goldin points out, about one-third of taxpayers self-prepared their returns in 1998, making it more likely that eligible filers would fail to claim the EITC on their returns. But due in large part to the prevalence of tax preparation software, the number of taxpayers filing without some preparation assistance is approaching zero. As the tax return preparation landscape changes, so must our approach to encouraging eligible individuals to claim social welfare benefits through the tax system. Goldin’s article, and his focus on taxpayers’ filing rate, provides important guidance to the IRS and policymakers in this regard.