What's the Best Way to Give Tax Refunds to the Working Poor?

Editor’s Note: This article previously appeared in a different format as part of The Atlantic’s Notes section, retired in 2021.

Gillian recently explored “How the Tax-Prep Industry Takes Advantage of Low-Income Filers”—namely by overcharging poor people to process the refund they receive through the Earned Income Tax Credit. “A new report finds that some Americans are giving away nearly 25 percent of their refund for services they could get for free,” Gillian wrote. Here’s a representative experience from a reader:

I get the EITC. This year I got my taxes done at H&R Block and they charged me almost $400. They didn’t have any price listings anywhere and didn’t explain pricing in person before we started. I walked in thinking it was a $50-100 service and left feeling scammed. Yes my refund is large, but that’s my emergency fund for the entire year. Next time I’ll know better.

A helpful email via hello@ just came in from two doctors, Michael Hole and Lucy Marcil, plugging a program they founded to help low-income people keep more of their tax money:

As pediatricians, we think Gillian B. White’s article means more than major tax-prep chains like H&R Block and Liberty taking money from America’s most vulnerable and working families. It means potential damage to the health and wellbeing of the country’s future and most precious resource—her children.

The EITC and Child Tax Credit, together, lift more children out of poverty than any other Federal policies. The EITC, in particular, has been linked to improved maternal health, higher birth weights among black populations, improved K-12 school performance, and increased adulthood income for children whose caregivers received the refunds.

[Our] new organization, StreetCred, files taxes and tax credit applications for low-income, working families waiting to see their doctors in pediatric clinics. For free. StreetCred, a VITA-sponsored organization that filed returns with 94% accuracy per the IRS during the 2016 tax season, maximizes convenience and minimizes complexity for taxpayers relying heavily on their refunds for basic necessities.

Screenshot from StreetCred’s website

Gillian also recommends these services:

There are large municipal programs like this: Boston Tax Help Coalition, and this volunteer program in DC, this is the big federally run one, VITA. There’s Campaign for Working Families in Philly. Then there are resources like this that help train groups of all kinds on how to put together events/campaigns for their communities.

Meanwhile, here’s a substantive back-and-forth between a few readers in the comments section. The first:

Bilking people out of their EITC is just a particularly egregious example of what’s wrong with EITC in the first place: Lots of low-income families have lousy money management skills, and dropping a giant chunk of cash on them in late April is a recipe for ensuring that the cash has a minimal impact on their well-being, and is all gone by May.

EITC needs to be disbursed in smaller chunks, over the whole year. There used to be a program called “Advance EITC,” which enhanced the earner’s paycheck, but it was discontinued because it was fraud-prone and difficult to administer. [CB note: Here’s a good 2009 post from The Tax Foundation if you’re interested in details over the AEITC’s demise.]

There’s simply no reason why there isn’t a decent, secure, low-fraud IT solution to make something like AEITC work. It probably requires some surveillance of bank accounts (which will cause all sorts of civil libertarian hand-wringing), but spreading the money out over the whole year will be massively more beneficial than dumping it as a lump sum.

This reader disagrees:

People with lousy money management skills will still have lousy money management skills, regardless of how you distribute the money. If you give it to them all at once, they’ll blow the whole chunk on a 70" flat screen. If you dole it out in smaller pieces each month, they’ll buy smaller stupid items each month.

A counterpoint from the first commenter:

Semi-competent money management isn’t rocket science; it’s something that most people learn when they’re kids. And how do they learn it? By being entrusted with small amounts of money and learning the consequences of spending it, either wisely or unwisely. Drop a year’s worth of allowance on a kid and tell him that it’s all he gets for the year and he’ll ... go out and buy a 70" flat screen. Give him a weekly allowance and he’ll discover what he can and can’t do with it. He gets to make lots of little mistakes instead of a couple of big ones.

Update from a reader who essentially rebuts both of those readers, pointing to a 2015 report from the Center on Budget and Policy Priorities:

The study found that the families spent roughly half of EITC refunds on current consumption, such as groceries, child expenses, and furniture. They spent the other half paying off past-due bills and debt, and for “asset-building” such as savings, education, or home ownership and home repairs. Nearly two-thirds of families spent part of their refunds on expenses related to raising children, and about one-third made car purchases or repairs.

Hardly “smaller stupid items,” in other words.