The Earned Income Tax Credit and the Limitations of Tax-Based Welfare Reform

Abstract

The earned income tax credit (EITC), which uses the federal income tax system to provide an earnings subsidy to low-income workers, has enjoyed support across the political spectrum as a pro-work, pro-family alternative to traditional welfare programs. Advocates of the EITC also claim that the EITC's tax-based administration is cheaper and less stigmatizing than traditional welfare administration. In this Article, I argue that the case for the EITC has been oversimplified in two significant ways. First, the Article argues that both advocates and opponents of the EITC place undue emphasis on whether it discourages work and marriage. The conventional policy debate over the EITC's behavioral incentives is too narrowly framed: the debate relies on incomplete economic analysis and reflects important but unacknowledged normative tensions.Second, the Article shows that the EITC, as a tax-based income-transfer program, faces institutional constraints not present in traditional welfare programs. Although economists and policy analysts have long advocated integration of the tax and transfer systems, they have overlooked the problems of inaccuracy, unresponsiveness, and noncompliance that are inherent in tax-based administration. Reforms might improve the EITC's performance, but such improvements would require either comprising the benefits of tax-based administration or undertaking a major restructuring of the federal income tax system. Absent such changes, the EITC and similar tax-based transfer are likely to prove widely acceptable only if we revise our expectations about accuracy, responsiveness, and compliance.