It's tax time again-a painful and costly ordeal for many of us. Yet for more than 16 million impoverished Americans, a unique anti-poverty program called the Earned Income Tax Credit (search) may bring some much needed tax relief this year.
If you've never heard of the earned income tax credit, you are not alone. The EITC gets very little press compared to other social welfare programs, primarily because the broad bipartisan support it receives has shielded it from controversy. But over the past few years, concerns about inaccurate and misleading applications have cast a cloud of suspicion on the program.
Enacted by Congress in 1975, the EITC is a refundable tax credit administered by the Internal Revenue Service, an agency not generally known for caring about our welfare. Each year, millions of low-income taxpayers (primarily families with children) qualify for and receive thousands of dollars from the federal government to supplement their earnings.
As tax credits go, the EITC is unique because it has the potential to "reimburse" individuals who pay no federal income taxes-literally putting cash in their pockets and raising their income for the year. The EITC is not a safety net program. Its benefits are only available to persons who have worked and received earnings during a given tax year.
The EITC's ability to raise families above the poverty level (search) is unchallenged. Thanks to a higher profile during the debate over welfare reform, the EITC has grown to become the largest federal cash or near-cash assistance program directed at low-income families, paying out nearly $28 billion in 2002.
Yet generous benefits (as much as 40 percent of one's income) have also encouraged widespread abuse. Back in 1999 the IRS estimated that it had paid out between $8.5 billion and $9.9 billion in false claims. Three in every 10 EITC requests had errors, a rate far higher than other social welfare programs.
This issue of noncompliance has been a sore spot for the IRS for almost two decades. Last year, the IRS proposed a pilot project to root our EITC cheaters that would require a small number of applicants to be precertified in order to qualify for the tax credit.
Individuals selected for precertification for the 2003 tax year will have to submit additional paperwork confirming their eligibility (such as school or medical records verifying the number of children claimed). Others will have their income checked by the IRS to make sure they did not make more money than reported.
Eliminating government waste and tax fraud might seem like a straightforward, uncontestable idea; however, the efforts of the IRS to reduce noncompliance have been met with fervent opposition by advocate groups and some members of Congress.
The three main charges include questions about the reported level of abuse, concerns that the pilot project will discourage eligible needy candidates from applying, and the legitimacy of targeting low-income families. Rep. Rosa DeLauro (search), D-Conn., summed up the opposition's argument: "Those in support of the program seem to believe we should go after low-wage workers while overseas companies go scot-free."
The implication that the IRS is "going after" the poor is misleading. It was Congress that ordered the IRS to improve EITC compliance beginning in 1997, and backed up the mandate with special funding. Some progress has been made, thanks in part to the use of technology to cut down on abuse. But high rates of noncompliance persist. In fact, as recently as 2001 the General Accounting Office identified the EITC as a high-risk area for the IRS.
The IRS's narrowly targeted pilot project to eliminate EITC cheaters is unlikely to cause harm or undue burden on qualified applicants. Accusations of a deliberate attempt to intimidate and confuse the poor are false. About one-tenth of one percent of EITC claimants will be precertified and only persons who have a history of misreporting their income to increase benefits will be subject to income verification.
The strongest criticism-focusing on low-income working families rather than corporate and high-income tax evaders-has emotional punch but unfortunately rests on a false dichotomy. This is not an either-or scenario. The IRS can and does actively pursue all types of tax fraud, spending more than $3.5 billion a year on tax law enforcement, 23 times the amount earmarked for EITC compliance.
At some point the arguments over reducing EITC fraud become ideological. For many advocates of the working poor, the issue is infused with concerns over social justice. The poor already suffer enough, so why go after them to scrape together a few misallocated dollars?
But consider the lesson such a stance imparts to poor families. The EITC program is specifically designed to encourage Americans to choose work over welfare as the path to a better life. If cheating is ignored or knowingly tolerated, the implications can carry forward into work, schooling, and other areas of life.
The reach of EITC is enormous, and its central role in fighting poverty demands a public policy that is consistently affirming of the principles of hard work and honesty.
Jeffrey M. Jones is a public affairs fellow at the Hoover Institution