Started during the Ford administration and expanded several times since, under Republican and Democratic presidents, the earned-income tax credit is one of the federal governments most efficient means of encouraging work and fighting poverty. The $60 billion-plus program pays low-income workers a wage supplement, in the form of a tax credit, that can be worth more than $5,000 a year to a family with two children. Among its other benefits, the EITC has offset higher Social Security taxes and much of the minimum wages inflation-adjusted stagnation in recent years.
Yet as even its supporters must acknowledge, the EITC delivers its benefits with significant imprecision. As a freshly issued Internal Revenue Service inspector generals report noted, at least one of every five EITC dollars in 2012 was improperly awarded; thats $11.6 billion. This figure does not take account of those who were entitled to more than they got or were eligible but failed to apply; improper payments are down since their 2010 peak of at least $15.3 billion. Even in a $3.6 trillion budget, $11.6 billion isnt chump change. The inspector general concluded that the IRS has failed to comply with President Barack Obamas 2009 executive order on improper payments, and it sees little prospect that traditional IRS methods can significantly reduce them.
Predictably, some conservatives leaped on the report as proof that the EITC is wasteful beyond repair. This is unfortunate both because Republicans in the past generally understood the EITC, whose intellectual godfather was conservative economist Milton Friedman, as a market-friendly approach to poverty, and because it can be fixed.
Many overpayments are because of the programs complexity, especially in how it accounts for child custody; others are caused by the proliferation of sketchy tax preparers, such as those who offer EITC claimants loans payable with their EITC checks, minus a hefty fee. The former issue could be addressed through simplification of the rules by which separated parents can apply, as President George W. Bush recommended several times – to no response from Congress. As for the tax preparers, Congress should allocate more resources to IRS enforcement, and the IRS should more tightly regulate those who make a living submitting tax forms, requiring of them the same level of training and continuing education that, say, real estate agents must accept.
Alas, an IRS effort to impose a form of licensing was struck down by a federal judge in Washington this year on the grounds that tax law did not specifically authorize such a restriction on the rights of freelancers. The IRS appealed, but comments by judges at oral argument before the U.S. Court of Appeals for the District of Columbia Circuit last month suggested that the agency will fare no better there.
If the IRS does not prevail in court, Congress should pass the necessary legislation. Meanwhile, it could pass more user-friendly rules for the program, along with allocating the resources the IRS needs to combat errors, both intentional and otherwise. The EITC can do an even better job of encouraging the poor to work, at lower cost to taxpayers. These are, or should be, conservative goals. But it will take a properly equipped and empowered federal government to achieve them.