Silviase/jgov_v1.4_full_ann huggingface dataset:
problems to examining EITC incidence are formidable, Rothstein (2008) concludes that wage reductions reduce EITC payments by 0.30 for every 1 of EITC for low-skilled single mothers, and wages falls by 0.43 for every 1 of EITC for low-skilled ineligible workers. $ ^{21} $ Leigh (2009) finds even larger effects.

## EITC Administration and Compliance

Compared to alternative delivery mechanisms, the U.S. EITC is inexpensive to administer. As noted above, most EITC recipients would have to file a tax return even in the absence of the credit, so the costs imposed on taxpayers — filling out Schedule EIC — is small. The cost to the IRS is also quite small. The entire IRS budget in FY2008 was 11.1 billion and the IRS served handled more than 250 million tax returns and collected 2.7 trillion in taxes. The incremental cost of administering the EITC is surely a tiny fraction of this total. The costs of administering two other major income support programs for low-income families are several billion dollars alone. $ ^{22} $

While a system based largely on self assessment (like the U.S. income tax) will have lower administrative costs than a more bureaucratic approach, it will also have higher noncompliance. The most recent study of EITC noncompliance examined returns filed in 2000 (for tax year 1999) and found that of the 31.3 billion claimed in EITC, between 8.5 and 9.9 billion (27.0 to 31.7 percent of the total) exceeded the amount to which taxpayers were eligible (Internal Revenue Service, 2002b). Of the errors that the IRS was able to classify, roughly half arise because of qualifying-child errors. $ ^{23} $ About half of those (or 25 percent of the total) arose because
the child claimed was not the taxpayer’s qualifying child. Of these errors, the most common problem was that EITC-qualifying children failed to live for at least six months with the taxpayer claiming the child. Mistakes of this type can run the gamut from innocent taxpayers running afoul of complex IRS rules to fraud.

These errors were not due to taxpayers “making up” children that they did not have. The IRS will match the social security numbers of EITC-qualifying children claimed on tax returns to registered social security numbers. The problems instead arise from the fact that tax returns do not collect information on the location of children during the year. Consequently, absent additional information, the IRS has little ability to scrutinize EITC-qualifying child claims for actual children who perhaps do not live with the taxpayer, particularly prior to when the EITC is paid out. It is also difficult for the IRS to investigate claims about self-employment income before the EITC is paid out.

b. The Working Tax Credit and Child Tax Credit in the United Kingdom $ ^{24} $

Experience with refundable tax credits in the U.K. offers additional insight into design issues and policy considerations that arise with credits targeted to low-wage labor markets. The child tax credit provides income-related support to the main care-person of children. Around 90 percent of U.K. families with dependent children are eligible. The working tax credit (WTC) provides in-work support to around 1 million single people and couples with or without children in low-paid work. $ ^{25} $

In 2003-04, the WTC provided single people without children an annual credit of UKL 1,525. Single parents and couples with or without children are entitled to an annual credit of
UKL 3,025. There is a bonus for those working 30 or more hours a week. $ ^{26} $ Families with children and all adults working can receive an additional credit on approved childcare costs (up to 70 percent of childcare costs for expenses up to UKL 200 a week for families with two or more children). $ ^{27} $

The following subsections highlight instructive differences between the U.S. EITC and the U.K working tax credit.

Imposition of a threshold hours requirement for eligibility

By raising the after-tax return to work, both the EITC and the WTC have unambiguously positive work incentive effects for households fully out of the labor market. But for households in the phase-in range of the EITC, the incentive to work more hours is mixed. The increase in the after-tax wage creates an incentive to work more hours (this is the substitution effect). But the income generated by the EITC creates an incentive to work fewer hours, assuming leisure is a normal good (this is the income effect). For households in the plateau and phase-out ranges of the credit, the EITC provides unambiguous negative incentives on hours. By imposing an hours threshold instead of phasing in, the U.K. working tax credit increases the number of households receiving positive employment and hours incentives relative to a credit on the first dollar of earnings. All households working fewer than 16 hours will see an increase in the after-tax return to work (and, since they do not receive any credit if they have fewer than 16 hours of work, there is no incentive to “buy” more leisure).
Hours limits impose a potentially significant additional administrative burden — because hours information is typically not required to implement an income tax — so their desirable labor market incentive effects must be balanced against the additional costs that arise from administering the hours requirement.

The working tax credit is on a family basis, the tax system is on an individual basis.

As in many countries, the U.K. income tax is levied on an individual basis. The WTC, however, is based on family incomes. Policy-makers in the U.K. believe it essential to target tax benefits on the basis of family income, since it is widely believed that families pool resources when making economic decisions. Eligibility is established by submitting a form to Inland Revenue claiming eligibility based on income in the current tax year (applications will generally be made in the summer and the award based on annual income in the previous tax year). Payments are reflected in worker paychecks as employers adjust their tax and social insurance withholding. At the end of the year, the Inland Revenue will recalculate the credit amount the family is entitled to. Families entitled to a larger WTC will receive the difference. Families entitled to a smaller credit will need to pay back some of the overpayment, though the first UKL 2,500 pounds will be disregarded when making this calculation.

The U.K. experience shows that it is possible to deliver a tax credit based on family circumstances in a tax system that uses individuals as the basic unit of personal income taxation. But the experience does not seem to have been altogether successful. The take-up rate of the working family tax credit — the structurally similar predecessor to the WTC — was only 62 to 65 percent, compared to take-up rates for income support and housing benefits that were over 95 percent in 1999-2000. Low take-up is presumably due, at least in part, to the difficulty that arises in claiming a family-based credit in an individually-based tax system.
Working family tax credit employment effects appear smaller than those for the EITC

Blundell and Hoynes (2004) review evidence on the employment effects of the working family tax credit (the WTC predecessor) and the EITC and note that the EITC seems to have a larger effect on employment, even though average EITC benefits are somewhat smaller than average working family tax credits. This may in part be because the incentive effects of in-work benefits in the U.K are dulled by integrations with the rest of the tax and benefit system: U.K. households stand to lose substantial amounts of other benefits when they work. In the U.S., in contrast, expansions of the EITC have generally been accompanied by reductions in other safety net payments (and the imposition of time limited welfare and a strong policy push to increase employment of low-skilled women with children).

It is clear that other aspects of the safety net will affect the behavioral responses to employment-based tax credits. In particular, employment generated by EITC-like employment subsidies can be negligible if the benefit reduction rates of other safety net programs are high when individuals earn additional labor market income.

### 3. Three Major Antipoverty Policy Challenges

In section 1 I described the wide range of programs that compose the U.S. safety net. In section 2 I described in greater detail the role played by the EITC in addressing poverty and economic insecurity in the U.S. As is clear from the patterns in Figure 1 on overall poverty, and Figure 2, on child poverty, there are many remaining challenges confronting those who are designing policies to improve the well-being of low-income individuals and their families. For example, the U.S. spends a relatively small fraction of its Gross Domestic Product on antipoverty policies. But major changes in poverty will not be achieved by simply reshuffling the 1.8
percent of GDP that is spent on cash and in-kind means-tested transfers (excluding Medicaid). $ ^{28} $ If antipoverty spending as a fraction of GDP simply increased to its average level over the last 31 years of 2.0 percent, there would be an additional 26.5 billion for new initiatives. Thus, a challenge in every society (with the U.S. being no exception) has to do with constraints imposed by available resources. This problem is well-known and I claim no special insight into how to solve it. Instead, in this section I raise three additional issues that have received less attention in the U.S. poverty policy literature. These issues are raised to reinforce a theme of this paper that, while the EITC is a sensible, generally effective component of U.S. antipoverty policy, it is in no way a complete solution for very difficult underlying problems.

## Poor childless individuals

Since at least 1984, there has been a striking increase in the number of poor childless families in the U.S. “Childless families” in this context includes many single people (in U.S. Census Bureau language, these are “unrelated individuals”). Census figures show the percent of persons in families below the poverty line who were unrelated individuals rose from 20 percent in 1984 to 27 percent in 2004, and the percent of persons in families in deep poverty (that is, with incomes under 50 percent of the poverty line) who were unrelated individuals rose from 18 percent in 1984 to 30 percent in 2004. SIPP data indicate that our non-elderly, non-disabled childless population has characteristics associated with long-term disadvantage – 25 percent are black or Hispanic, and 45 percent have a high school degree or less, for example. $ ^{29} $ Twenty-two percent of these individuals are under 25, and hence this group is not disproportionately students.
(moreover, there has not been a sharp increase in the fraction of the population going to college in the U.S.). Eighty-two percent of this population is single. Males are 53 percent of the group. There has been considerable policy interest in recent years about the economic problems faced by low-skilled single males (see, for example, Holzer, Edelman, and Offner, 2006; Berlin, 2007; Scholz, 2007). The data here suggest that the problem of low-skilled individuals, nearly fully disconnected from the formal labor market, is of rapidly growing importance.

One vivid example of the challenges associated with designing policy to improve the economic circumstances of poor, childless individuals is raised by incarceration policy in the U.S. In 2001, the lifetime probability of a male spending time in jail or prison was 5.9 percent for whites, 32.2 percent for blacks, and 17.2 percent for Hispanics. One of the particularly troubling weaknesses of the work-based safety net is its inadequate provision for dealing with the increasingly difficult challenge of accommodating the large number of men and women who are or were in prisons and jails in the United States. Extensive social science evidence documents the employment difficulties associated with prolonged exposure to the criminal justice system. It is hard to imagine healthy communities in which, for example, one-third of poorly educated prime-age African American men may be in jail or prison on a given day and a considerably larger fraction are or have previously been under the jurisdiction of the criminal justice system. Most of these men have child support orders and little income that they can use to meet their financial responsibilities to their children. While they face extremely poor employment outcomes, there are few existing federal or state programs that are designed to foster economic self-sufficiency of single, non-custodial parenting men, particularly those with a criminal record.
Can a work-based safety net succeed in a rich industrialized country?

A fundamental problem confronts a rich society that designs a work-based safety net. What do you do with individuals (who perhaps have children) who are unwilling or unable to work? Barriers to work may include mild mental retardation, domestic violence, drug or alcohol addiction, mental health issues, spatial mismatches between residential and employment locations, and many other issues. These issues create a long-recognized, but inescapable tension that arises with a work-based antipoverty strategy: we wish to provide a humane level of benefits to low-income families, but in doing so, we create incentives for persons to utilize government assistance rather than move into employment. Recognizing this problem and designing a system that adequately accommodates the needs of these individuals and families, without undermining incentives for work, is a central challenge for a work-based safety net.

There are a range of potential options. As noted above, the U.S. has programs targeted to individuals with disabilities. One possibility would be to expand non-cash, means tested programs and redouble efforts to enroll families and individuals into these programs who, for one reason or another, are unable or unwilling to work. Another possibility would be to create special programs, including perhaps temporary or semi-permanent jobs that help highly disadvantaged single mothers who are having problems finding stable employment. A third option, of course, would be to again alter program rules so access to benefits is no longer dependent on work. But without some modification of existing practice, the U.S. faces the possibility of its most disadvantaged citizens needing to survive without access to adequate resources.
Can low-skilled workers in the U.S. achieve self-sufficiency? $ ^{30} $

The idea that work is the gateway to self-sufficiency and the way out of poverty is a simple, powerful message. Work-based welfare reform aligns the structure of the safety net with the central values of Americans who are not on welfare. It is difficult to see how the safety net for disadvantaged families could fail to embrace work when over 75 percent of women and 91 percent of men between the ages 25 and 54 are in the workforce. $ ^{31} $

As appealing is the rhetoric of self-sufficiency, it collides with an exceptionally difficult reality for those individuals and families who struggle to escape poverty even as they work, or who cycle in and out of work and welfare. To satisfactorily escape poverty, heads of households have to find and hold jobs that allow them to nurture the physical and psychological well-being of children and other adults in the household. At the same time, it appears that the ability of these adults to support their families at anything close to poverty-line earnings is limited. $ ^{32} $

The labor market skills of a substantial fraction of adult welfare recipients are notably modest. Just prior to welfare reform, for example, 42 percent of adults in families that received welfare benefits at some point during the year had less than a high school diploma. The overall employment rate of prime-age workers with less than a high school diploma was only 36 percent. Despite educational and other disadvantages that low-income families and individuals face, the U.S. successfully reduced welfare caseloads, from a peak of 5.1 million families in March 1994.
to 2.1 million families in March 2001 and further to 1.7 million families in 2009. These reductions were generated, in part, by far-reaching changes in the way states implement and manage programs, most notably the increased focus on work (Grogger and Karoly, 2005; Mead, 2004). In addition, until 2001, the economy was very strong, generating more than 17 million new jobs and pushing unemployment rates to their lowest levels since 1969. Wages grew throughout the income distribution, as they did not during the economic expansions in the 1980s, while real Earned Income Tax Credit (EITC) benefits more than doubled. Poverty among single-parent (mostly female-headed) households also declined precipitously until the recession of 2001. In effect, this coincidental timing of welfare changes, the strong economy, and EITC expansions paved the way for many more low-skilled people to enter the workforce and improve their economic well-being, although the relative contributions of these factors to their increased employment and reduced poverty is still a matter of debate.

A substantial body of prior research examines average earnings and earnings growth among families leaving welfare after the reforms and concluded that despite the exceptionally strong economy and rapid job growth of the later 1990s, the earnings of welfare leavers were still very low and job turnover was high. In their study of welfare reform experiences in six large cities during the 1996-1999 economic expansion, King and Mueser (2005) observed an increase in the number of individuals who left welfare prior to finding employment. Based on their careful analysis, they suggest that although one might argue that most of these individuals were drawn off of welfare by new employment opportunities, it is more likely that their exit from welfare reflected other factors, including the more stringent conditions for welfare receipt. They concluded that welfare reform did not change the reality that labor market demand for this group
“seldom provides earnings sufficient to pull a family out of poverty,” and that individuals were probably not made better off by reform (King and Mueser, 2005: 165).

Employment is an important first step for families trying to achieve self-sufficiency, but the earnings of most individuals who left welfare during the strong economy of the 1990s were still well below the poverty line, even many years after their exit. $ ^{33} $ And although a majority of studies have focused exclusively on the earnings of individuals rather than the total income of families, the limited set of more recent studies that have attempted to account for the earnings and benefits available to families suggest that the conclusions we draw from the experiences of individuals hold more broadly (Meyer and Cancian, 1998; Primus, et al. 1999). Hence, the degree to which work will be the primary antidote to poverty will depend greatly on the ability of low-skilled people to maintain employment that, over time, offers a progression of incomes that allows families to be self-sufficient. To date, the evidence in support of a strictly work-focused approach is hardly auspicious.

### 4. Final Thoughts

As the preceding discussion makes clear, there are many challenges facing low-wage labor markets in the United States. But work is a foundation to the U.S. approach to antipoverty policy for non-elderly, non-disabled individuals. A cornerstone of work-based antipoverty policies is the EITC. While the EITC is far from a cure-all for all problems of low-wage labor markets, it effectively transfers tens of billions of dollars to low-income working families, without creating substantial adverse effects on labor market behavior, fertility, or marriage.
A number of issues likely would arise in other countries if policymakers (and citizens) elsewhere would like to implement EITC-like policies. These are briefly discussed below.

Clarity of purpose is critical for designing and evaluating an EITC

There are many possible goals for an EITC, and each may have specific implications for its design. For example, a central goal of an EITC might be to augment incomes of families with low-skilled workers in ways that minimize undesirable labor market incentives. If this goal is paramount, then policymakers would likely want to make the credit available to all working poor families, wage earners and self-employed alike. If, alternatively, the primary goal of the credit is to increase employment of low-skilled workers, policy-makers might want to tie the introduction of an EITC with a reduction in other safety net programs targeted to able-bodied individuals. Other goals for an EITC might be to draw workers from the informal to the formal sectors of the economy, in which case policymakers might wish to restrict the credit to workers in formal (and not self-employed) sectors of the economy.

One early justification for the EITC was that it offset the regressive (on an annual basis) payroll tax for social security. Indeed, for many years the EITC subsidy rate was equal to the employee share of payroll taxes. A leading justification for the EITC expansions in 1990 was that they offset the distributional consequences of capital gains tax reductions for upper-income households. Based on these U.S. experiences, it would be unsurprising to see EITC-like proposals in other counties designed to offset the incidence of taxes that are believed to disproportionately burden low-skilled workers, such as the VAT or other consumption-based taxes. With this policy justification, subsidies might be tied to the VAT (or consumption tax) rate. Choices will still need to be made about the targets of tax relief, whether workers with children, all workers, or workers employed in the formal sector.
Designing a family-based credit in an individually-based tax system

The personal tax systems of most countries in the world are organized on an individual basis, as opposed to family basis as done in the U.S. But economic decisions are typically made, and resources shared, on a family basis. Hence, income assistance is best done on the basis of household (or family) resources. One may not wish to use scarce public resources to provide income support, for example, to the spouse of a highly paid executive. A policy choice to administer the EITC on a family basis raises several issues.

First, the family will have to be defined. This needs to be done in a way that tax administrators can easily, electronically verify. Parents and their dependent children living in the same dwelling is a natural unit, in that it should be conceptually straightforward to verify the information. But one might also want to include the resources of grandparents, for example, if they are living in the same residence.

Second, filing procedures need to be developed, by which eligible families augment the individual tax return with a return on a family basis that claims the earnings credit. A concern may arise if low-income households with no tax liabilities are not filing tax returns and, more troubling, do not have employers that are reporting their wages to the tax authorities. Adding potentially many new taxpayers to the system has the potential to create substantial administrative problems. In many countries low-skilled workers have unstable employment, so wage and salary reports will need to be matched from multiple employers. Their family relationships and their residential locations can be fluid. Many will be working in the self-employment and day laborer sectors of the economy or are otherwise on the fringes of formal employment relationships. Providing tax credits to this segment of the population presents formidable administrative difficulties.