Other Reforms: Labor Supply, Compliance, and Timing
Neither of the proposals are designed primarily to improve the EITC's labor-supply impacts, though here too there are reasons to be dissatisfied with the status quo. The EITC has large positive effects on labor force participation among single parents, with little ifany negative effect on hours of work of those who would work in any case. But for married couples the labor-supply impacts are not so positive: Eissa and Hoynes (2004) document a negative effect on the labor supply of married women, many ofwhom are secondary earners and who therefore would qualify for a larger EITC if they did not work than if they did.
Unfortunately, there are few good options for avoiding this problem. It is merely an example of the marriage penalties that are inherent in any progressive, family-based tax system and, like other marriage penalties, is quite difficult to avoid. Berlin (2007) proposes making the EITC depend on individual rather than family earnings. Holt and Maag (2009) propose replacing the EITC and CTC with a worker credit, based on individual earnings, and a child credit based on family earnings. This would eliminate the second worker penalty, but would represent an enormous change in the US tax system and would cost tens of billions of dollars. A more incremental proposal comes from Kearney and Turner (2013), who would create a secondary earner deduction that would reduce the second worker penalty and effectively extend the EITC schedule for two-earner families.
In terms of compliance, the major issues concern overclaiming of qualifying children and misreporting of self-employment income. The first would be addressed by the expansion of the childless credit. The second is more difficult. California, which introduced its own EITC in 2015, disallows self-employment income from EITC calculations. TPC's model indicates that the total effect of adopting a similar rule at the federal level would be to reduce EITC expenditures by $11 billion. As this is far in excess of any plausible estimate of the amount of overpayment due to income misreporting, it is clear that the primary effect would be to deny the credit to many of the intended recipients. It might be better to tighten up enforcement around selfemployment income, while recognizing that not all misreporting can be prevented.
Another way to improve the performance of the EITC vis-a-vis our three objectives is to increase the take-up rate. The estimated 75% take-up rate, while high relative to other parts of the social safety net, still leaves room for improvement. We know that take-up is lower among those eligible for smaller credits, notably childless taxpayers and those with very low earning levels (Plueger 2009). A challenge with increasing take-up for this group is that it disproportionately includes those not filing a tax return (and often not legally required to). Recent evidence based on experimental designs and IRS partnerships shows that informational mailers can lead to significant increases in take-up (Bhargava and Manoli 2015; Guyton et al. 2016).
A final type of change to consider would be one aimed at distributing EITC and CTC payments more gradually rather than as annual lump sums, as this is a persistent limitation of the EITC as an anti-poverty program. Unfortunately, in the wake of the failure of the Advance EITC program, we are not aware of good proposals to do so. Much more needs to be understood about the role that EITC payments play in their recipients' lives (see, e.g., Halpern-Meekin et al. 2015) in order to inform welfareimproving changes of this type.