Tax Policy

Earned Income Tax Credit: Design and Administration Could Be Improved Gao ID: GGD-93-145 September 24, 1993

In 1990, Congress changed the qualifications for and substantially increased the size of the earned income tax credit, partly to make the overall federal tax system more progressive. Since then, several proposals have been introduced in Congress that would further boost the size of the credit to improve the economic situation of low-income workers with families and to make the tax system even more progressive for low-income households. This report assesses whether the earned income credit is achieving its objectives and discusses problems that the Internal Revenue Service has encountered in administering the credit. GAO (1) examines how the benefits are distributed among taxpayers, (2) measures the extent to which the credit offsets the payroll tax and increases the progressivity of the federal tax system, and (3) estimates the effect of the credit on work incentives. GAO also examines how IRS has tried to ensure that the maximum number of qualified recipients receive the credit without unduly increasing the number of illegitimate claims.

GAO found that: (1) most low-income families are not eligible for EIC, since it is targeted to working families with children; (2) the EIC participation rate cannot be estimated, since the eligible population is not known; (3) EIC benefits have increased significantly since 1975, and the average EIC will increase to $1,067 in 1994; (4) only 18 percent of low-income filers have received EIC; (5) EIC will offset almost all payroll taxes for the average low-income recipient in 1994; (6) low-income workers without children are not relieved of their payroll tax burden; (7) EIC enhances work incentives particularly for low-income workers, but slightly reduces the work hours of other qualified recipients; (8) IRS administrative burdens have been reduced by simplifying EIC eligibility requirements, but new provisions have created problems in EIC administration; (9) IRS returns processing procedures do not treat EIC filers consistently and allow ineligible taxpayers to receive EIC; (10) many eligible families do not receive EIC; and (11) IRS needs to increase its efforts to notify eligible taxpayers of EIC.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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