So Just How Big a Deal Is EITC ‘fraud’ Anyway?

I just posted a really fascinating interview with Bruce Meyer, a visiting scholar here at AEI and a professor at the University of Chicago’s Harris School of Public Policy, on inequality and poverty. So much good stuff in our longish conversation that I thought I would highlight some of it. So for starters, here is our exchange about the Earned Income Tax Credit. Economists tend to support the EITC as an effective poverty fighter and work promoter. But some critics, especially on the right, see the program as rife with “fraud.” From my chat with with Meyer:

I think if you surveyed a lot of our economists, they would tell you they like the Earned Income Tax Credit as an anti-poverty policy. Is this an accurate assumption?

Yes, they like it because it transfers income to those who are needy in a way that does not discourage work; in fact it tends to encourage work. It’s well targeted because it goes to people who are low income, particularly those who have children. It’s bigger for larger families that might have more of a need for help. So it really has a lot of attractive features.

So, what about that fraud issue many conservatives gripe about? Is it an overpayment or mispayment issue? What is happening there with that?

I think that that’s overstated. You sometimes will hear numbers like 30% — I probably shouldn’t repeat these numbers — that a substantial share of the dollars are paid in error. But many of these calculations don’t go back and say, “Well, the money went to grandma instead of her daughter who we think should get the credit.” Those statistics often will count the money that goes to grandma but then not net out the money that should have gone to the daughter, so it would’ve been paid out anyways; it just went to the wrong person.

Or, if a family really should’ve claimed three children rather than two children, they’ll call the entire payment fraud while really there’s an error and it’s just part of the payment.

Now, you don’t also want to call these errors fraud. It’s a scandal that the instructions for the Earned Income Tax Credit — I haven’t looked at the most recent tax guide — but it used to look something like 18 very dense pages out of the entire 200 pages of tax guide, so it’s just way too complicated. It’s not surprising that there are lot of errors under that circumstance.