The federal EITC, conceived as an incentive for low-income Americans to work, has been around for more than 40 years. But as with other public-benefit programs at all levels of government, it suffers from notoriously low take-up rates. Nearly a quarter of those eligible for the federal EITC fail to claim their benefits, which amount to 33 days of extra income on average per recipient. This means that approximately 7 million individuals are losing out on an average of about $1,100 each. This missed benefit could make a real difference to the low-income Americans eligible for the EITC, who on average earn about $14,000 a year.
The credit's complex structure may be partly to blame for its underutilization. A lack of concise information from the IRS explaining this structure, and the credit's further dependence on individual income, marital status and number of children, can make it challenging for families to calculate how much credit they should expect to receive.
Low take-up is a pressing policy issue with non-trivial costs including over-reliance on other social programs. Yet researchers have found that simple, low-cost tweaks can go a long way toward increasing benefits usage.
Working in collaboration with the IRS, Saurabh Bhargava of Carnegie Mellon University and Dayanand Manoli of the University of Texas at Austin tested multiple strategies in a randomized evaluation to encourage more eligible individuals to claim their EITC. Every year, the IRS sends out reminder notices and worksheets to anyone who files a tax return but does not claim their EITC despite appearing eligible. Individuals who sign and complete the worksheet -- typically fewer than half of those who receive it -- are sent a benefit check within three months.
Bhargava and Manoli followed up with those who didn't respond to the IRS reminder with another letter several months later, again explaining the EITC and offering a worksheet to complete and return. They tested multiple versions of the letter, sending some that were similar to the standard, complex IRS reminder and others with a simple and concise message. Some letters also included the amount of the benefit participants might expect to receive or messages aimed at de-stigmatizing the receipt of social benefits.
The study found that simply reminding individuals about the EITC multiple times can significantly increase take-up. Overall, 22 percent of those who received the second reminder responded to it. But how this information was delivered made a big difference. Twenty-three percent of those who received reminders in simplified language claimed their EITC, compared to only 17 percent of those who received reminders with the standard complex information. The highest response rate, 31 percent, came when the amount of the expected benefit was included -- regardless of the displayed amount. Importantly, response to the complex mailings was lowest among the poorest individuals in the sample.
Low take-up of social benefits is hardly exclusive to tax credits, and the EITC's take-up rate actually compares favorably with other major federal programs such as Temporary Assistance for Needy Families (TANF), the Supplemental Nutrition Assistance Program (SNAP, or food stamps), and Supplemental Security Income (SSI). The EITC study demonstrates that increasing take-up does not need to be a resource-intensive endeavor -- that simple and low-cost solutions such as simplifying forms or clarifying benefit amounts can be highly cost-effective.
Based on the study's findings, the IRS redesigned its EITC reminder notice, simplifying the information and displaying potential benefit amounts. (An example of the current, updated notice can be seen below.) This inexpensive marketing intervention is not only easily scalable but also a potentially more effective strategy for improving benefit take-up among high-priority groups than traditional -- and sometimes controversial -- program incentives such as offering financial bonuses to individuals who sign up.
Beyond the issue of improving take-up of social benefits, this study demonstrates that on a policy issue with politically charged, viable arguments on both sides, rigorous research can provide a path to program management that makes a real difference in people's lives.
An example of the simplified earned income credit reminder notice now being used by the IRS.
