Syracuse
University
Economics
Andrew Hanson, PhD Candidate
"Utilization of Tax Credits by Low Income Individuals" National Tax Journal, Vol. 58, No. 4 December 2005: 743-786 (with Stacy Dickert-Conlin and Katie Fitzpatrick)
Abstract:
The Internal Revenue Service -- a sub-agency that exists to collect
revenue -- has the task of administering and enforcing a wide array of
social policy: from subsidies for college and child care expenses, to
creating jobs in depressed areas, and assisting welfare recipients with
employment. While these new or expanded credits represent a new paradigm
in the delivery of social policy, little is known about who uses these
programs and, equally important, who does not use these programs. Understanding
utilization is a key to understanding how effective this means of
transferring income is and whether we are reaching the targeted
populations. This paper
provides a framework for thinking about utilization of tax credits among
low-income individuals, supported by existing research on credit
utilization.
We conclude that there is much work that needs to be done in understanding how these tax programs are utilized. It will be especially important to either expand data collection efforts to get data needed to accurately assess participation.
With the existing data, it appears that utilization is by far the largest for the EITC, possibly because it is the oldest of these programs, the only refundable program, and the best targeted at low-income individuals. Utilization is low among low-income individuals in some tax credits because low-income individuals are not eligible. A redesign, including reducing complexity and administrative burdens or making these programs refundable, would result in the programs reaching those that they are ostensibly targeted towards.
Conditional on being eligible, one common factor associated with increasing participation in many of these programs is a high benefit to cost ratio and sophistication with the tax system, whether that be through the use of a paid preparer, higher education levels, or experience with the tax system. Policymakers should think creatively about reducing filing burdens to increase participation, such as through wider use of electronic filing.