Episode 451: Why Some People Love Tax Day : Planet Money On today's show, we look at a huge, often overlooked, surprisingly interesting corner of the tax code: The Earned Income Tax Credit.

Episode 451: Why Some People Love Tax Day

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MARIANNE MCCUNE, BYLINE: Tax Day is coming up. People love to complain about it but not this woman.

LYNN MATTHEWS: Yay, I'm so happy.

MCCUNE: That is Lynn Matthews (ph). She's a FedEx package handler. And I met her at a pro bono tax center in Newark, N.J., when she stopped in to get help filing her return. She was even singing while she waited.

MATTHEWS: (Singing in Spanish).

MCCUNE: And that's because for Matthews, tax time is bonus time. For people like her, that bonus can be a big one. It can be more than $5,000. Often, it's more than you paid in taxes for the entire year. Lynn Matthews is one of nearly 30 million people who receive this bonus. It doesn't sound exciting when you see it on the tax form. It's got a very technical, kind of boring-sounding name. It's the earned income tax credit. But Lynn Matthews doesn't find it boring at all.

MATTHEWS: (Singing) Oh, income credit. I'm so happy. I'm happy (laughter).



Hello, and welcome to PLANET MONEY. I'm Chana Joffe-Walt.

MCCUNE: And I'm Marianne McCune.

JOFFE-WALT: Marianne, we are so excited to have you here for your very first podcast. Marianne is one of our favorite reporters from WNYC. And she is on loan to us at PLANET MONEY for several months. And she has her first very exciting podcast today.

MCCUNE: For my first appearance, I have willingly chosen this incredibly sexy topic, this one quiet feature of the American tax code that might be the most genius thing in there, the earned income tax credit.


AALIYAH: (Singing) Here, take my hand again. Wipe those tears from your eyes.

MCCUNE: Chana, you've been so impressed by it that you've been talking about it at dinner parties I hear.

JOFFE-WALT: That is true. I did bring this up at a dinner party recently because you and I have been talking about it, and it seems like the kind of thing that there would be a big fight over. The earned income tax credit is one of the biggest cash transfers we have in this country - more than $60 billion last year handed from wealthier Americans to poorer Americans. You'd think there'd be a lot of discussion about this, right? And yet the surprising thing is almost everyone who looks at the earned income tax credit, the EITC, pretty much likes it, right?

MCCUNE: That's exactly right. It's been expanded by every president, right and left, since the 1970s. I'm talking Reagan, Clinton, both Bushes and Obama. As I was reporting the story, I talked to more than half a dozen economists, left and right. And pretty much all of them said that the earned income tax credit does exactly what it was designed to do. The architects of the EITC wanted to help poor people and at the same time, encourage them to work.

RICHARD BURKHAUSER: And by God, they did. It worked, you know. The rocket was launched and it hit the moon.

MCCUNE: This is Richard Burkhauser of Cornell University. And he told me that you do not see that kind of success very often when it comes to programs for the poor.

BURKHAUSER: I'm not exaggerating when I'm telling you - look, I've been doing public policy since the 1970s. And there's not a lot of these programs where you can see the tremendous change in the behavior of people in exactly the way that all of us hoped it would happen.

JOFFE-WALT: OK. So we've got 30 million people. Is that right? Thirty million?

MCCUNE: Yeah. Close to that.

JOFFE-WALT: So 30 million people who are receiving the earned income tax credit. It's cash that's going from wealthier Americans to those 30 million poorer Americans. So Marianne, can you just lay out how it works?

MCCUNE: OK. So very simply, the U.S. government says if you work but you're still poor, we're going to give you a bonus. And if you have kids, it's going to be a big bonus, a big chunk of money. It could be more than a third of what you made all year. And it comes in one big lump sum.

MARIANA OCHOA: (Unintelligible) please.

MCCUNE: When I was at the tax center in Newark, I met this woman named Mariana Ochoa (ph). And she says she still remembers the first time that she got it.

OCHOA: I - I say, are you serious? This is for me?

MCCUNE: It was about $3,000. And that's after making only about $9,000 the whole year working part time at a bank. And living on $9,000, that is really hard. Ochoa had to seriously save every penny of her money. She told me that on her long commute to work she remembers going past this one McDonald's every day and smelling the french fries but telling herself...

OCHOA: You have to say no because I have to pay my rent.

MCCUNE: Living on $9,000 is clearly very difficult. And if you want to design a policy that's going to help poor people, giving them $3,000 more, that's seems like a pretty intuitive thing to do. But the EITC, the more you learn about it, the more counterintuitive it seems.

JOFFE-WALT: So let's just walk through this. So imagine, you know, the way American policymakers have thought throughout history about helping poor people, you imagine the poorer someone is, the more help they need, so the more money you want to give them. So for example, you get food stamps or you get subsidized housing, you get, you know, free government health insurance if you're poor. And if you start working and make enough money, you get kicked off food stamps, or you get kicked out of your housing, you know, or you no longer have government health insurance because you no longer have need. And for most of us, we look at that and say that makes a lot of sense. And there's certainly lots of good arguments for why these programs are useful. But when economists look at that, they see something different. They see that you're actually paying people to stay poor.

MCCUNE: Right. So when they designed the earned income tax credit, economists were coming from a totally different direction. They did an economist mind flip. They said if the ultimate goal is to help people move up the economic ladder, then you have to pay them to move up the economic ladder. Somebody like Mariana Ochoa, when she made $9,000, she got a $3,000 bonus. When she made $15,000 four years later, she got $4,000 from the EITC.

JOFFE-WALT: Then that's the sort of economist mind flip - right? - is the more you make, the more the EITC pays you. And that's a pretty radical change, you know. It was in the '90s that the EITC was created in a big way, right? And that was when we were reforming welfare as we know it. So welfare up until that point had, for the most part, given people money because they proved that they had need, and then it would take that money away if they started working and made too much money. So the EITC was this new approach to that problem.

MCCUNE: Yeah. It's this very delicately designed equation. You start out. You make more and more money. You get bigger and bigger bonuses. And then at some point, you peak somewhere, say, between $12,000 and $20,000, depending on how many kids you have. And then the bonuses start to get smaller again.

JOFFE-WALT: But even when the bonuses are getting smaller again, they're not getting smaller so quickly that it makes you want to stay at a smaller salary.

MCCUNE: Right. And for Ochoa, this was like magic. When she first started getting the EITC, she was working part time. She was caring for a son who was in special ed. She was on food stamps. And she was in debt from her divorce. And since then, with help from the EITC, she has paid her debt. She's gotten off food stamps. She went to school for accounting. And when she was unhappy with the Newark high school her son was going to have to enroll in, she managed to even move to a better school district.

OCHOA: I found apartment there. And I changed my son life.

MCCUNE: Could you have moved to a nicer neighborhood with nicer schools without the earned income tax credit?

OCHOA: No. No. No. No, because my income - my income is low. It's low income.

MCCUNE: Economists say that children of families who get the earned income tax credit really do benefit, that this is not some aberration. They go further in school and they end up making more money.

JOFFE-WALT: OK. So we've got this delicately designed equation that actually pays you more the more money you make to help you move up the economic ladder. And then we have the second magic ingredient that makes the earned income tax credit so successful. And the second is that it just pays you cash. Like, it follows a very simple idea that economists love, which is that the best way to help poor people is to give them cash and trust them how to spend it best. And this kind of aid to poor families in economics is called a cash transfer. And right now, the majority of the assistance the government offers to poor people is not cash. We're not spending a lot of time handing over cash. The government is giving poor people things, like health care or vouchers for housing, food stamps, things called in kind transfers.

MCCUNE: There are a lot of economists out there who really prefer the cash transfers to the in kind transfers. And it's not just economists.


MCCUNE: If you ask someone like Ray Osorio (ph), the recent father of these two twin boys you hear napping loudly in his living room, cash is the only kind of help he wants.

RAY OSORIO: I know I know how to spend it (laughter). For everybody else - I can't speak for everyone else. I'm not sure.

MCCUNE: Two years ago, Osorio lost his job. And he actually qualified for food stamps.

OSORIO: I was eligible for it. I still am. But at this point and before then, I didn't need it. I had enough money. I had a good nut.

MCCUNE: So what made you say no to the food stamps?

OSORIO: I just didn't want to have that on me.

MCCUNE: Plus, living with his mom and his boys' mom, there's enough food in this house. He's not hungry. He didn't need food stamps. What he needed was some cash to invest in his business. He wanted to start a luxury car service, get a fancy ride to shuttle around actors and diplomats. And he knew a lot of people like that because of his years working in the hotel industry. So when his twins were born, he actually cashed out his 401(k) to buy this fancy car. He started his business and it's going along, but slowly, and he had just run out of all of his savings when he found out that he qualified for the earned income tax credit this year. And he said he was, quote, "delighted."

OSORIO: I was like wow, that's incredible. That's really - that's a really nice number.

MCCUNE: That's more than a third of what you made last year, right?

OSORIO: Definitely is. And it was incredible.

MCCUNE: So you're like woo, going on vacation.

OSORIO: Not at all (laughter). Not at all. I'm just looking - I'm just trying to focus on the future. Hopefully my business will bring me plenty of vacations later on down the line.

MCCUNE: Ray Osorio says he put that money to work - yes, some of it for diapers and for baby formula for the twins but more for his business. He says he got business cards. He got a new phone. And he polished up his workplace, his snazzy, black SUV.

OSORIO: Diplomats and actors don't want to be driven in a dull-looking, nasty car, so it was a must. But I think it was money well spent because I've made it back three times over now.

MCCUNE: Since you spent it this year?

OSORIO: Correct. So we're in good shape.

MCCUNE: So Ray Osorio says the money that he got from the earned income tax credit, he was able to turn it into more money. So we've got two EITC poster children here, Ochoa and Osorio. And there are millions more whose lives have really and truly been changed by this policy. But before we get too happy, Chana, I do need to say that the EITC doesn't solve every problem. First of all, it only helps people who are working. If you don't or can't work, there's nothing in it for you. Some people that should get it don't. And some people game the system. They get it when they shouldn't. And there are a lot of economists who argue that if you didn't have in kind transfers, like food stamps or government health care, the EITC wouldn't be so successful. It has to exist alongside those other programs.

JOFFE-WALT: Because a lot of people who are on EITC are also getting food stamps or getting those kinds of supports as well at the same time.

MCCUNE: Yes. It's different in every state, but certainly, people benefit from both at the same time.

JOFFE-WALT: OK. So maybe those things help the EITC be super successful.

MCCUNE: But still, the things that economists love about it, those things really do work.

JOFFE-WALT: OK. We've got the sort of economist mind flip of paying people more the more they make. And we have this idea that cash is better. And what's interesting about these two magic ingredients that make the EITC successful is that both of them actually trace back to a fairly unlikely suspect, a guy who is not the guy most people think of as the crusader for the poor. And that is conservative, free market economist Milton Friedman. Milton Friedman in the 1960s had this idea called the negative income tax. And we have a little bit of him on TV talking about it in 1968.


MILTON FRIEDMAN: The proposal for a negative income tax is a proposal to help poor people by giving them money, which is what they need, rather than is now by requiring them to come before a governmental official, detail all their assets and their liabilities and be told that you may spend X dollars on rent, Y dollars on food, et cetera, and then be given a handout.

JOFFE-WALT: Milton Friedman wanted to replace the whole web of services that the government was providing to the poor with cash. And he wanted to do it via the tax code with an equation that was supposed to work a lot like the earned income tax credit works now, where the more money you make, the more money the government gives you. So there's still an incentive to work.

MCCUNE: But with the negative income tax, if you didn't work at all, you still did get some cash. And when Friedman was making his case on TV to conservative commentator William F. Buckley, you can hear from Buckley's response that this idea was controversial.


WILLIAM F. BUCKLEY: What do you ought to do with a poor person who, having consumed his $3,000, or whatever it comes up to under the negative income tax, spends all of that on the races and then turns to the community and says this is the second of January and I've consumed my years of income now, meanwhile, I have four children.

MCCUNE: So Chana, remember Mariana Ochoa?

JOFFE-WALT: I do. Mariana Ochoa's the one who moved to the better neighborhoods where her kid could go to a better school.

MCCUNE: OK. So there's one thing that I didn't tell you she did with the money that she got from the EITC.

JOFFE-WALT: She went to the races.

MCCUNE: No, she actually spent about $1,000 of it, which was a third of the the tax credit that she got, on two plane tickets to Disney World and Universal Studios.

JOFFE-WALT: So in addition to being super responsible and investing in education and her son's education, she also fulfilled William Buckley's worst nightmare.

MCCUNE: Exactly. She says her son's favorite part was The Incredible Hulk roller coaster.

OCHOA: He's a small, little boy and running and saying, Mother, come with me, do the ride. I say no, it's too much. I cannot do it. But go, go.

JOFFE-WALT: I mean, that is - that's basically what commentators like William F. Buckley were warning about 50 years ago. You know, it's what, basically, Ronald Reagan was warning about with the welfare queens 30 years ago, this concern that you're going to take money from wealthier Americans and then those wealthier Americans are going to have to watch poorer Americans waste money on things like Disney World.

MCCUNE: Yeah. But the thing is, a lot of economists will still tell you this is not a problem. I spoke with Ed Glaeser, and he's an economist at Harvard but he's also affiliated with the Manhattan Institute, a conservative think tank. And this is a guy who argues that cash is one of the best ways to help poor people. So I told him about Mariana Ochoa and how she spent that first part of her tax credit on Disney World. And I ask him...

Does that seem like a good use of taxpayer money?

ED GLAESER: You know, we're giving them money to make their lives better. I don't know what the year of the woman's life before they went to Disney World was like. I don't know how much this kid has suffered. I'm not going to say that this is a terrible thing for the person to do. It doesn't sound like an absolute acme of wisdom to me. But nonetheless if this is what she sees as being the thing that would bring the most joy to her kid, I'm not going to castigate that as a great crime.

MCCUNE: So in fact, Mariana Ochoa looks back on the time in Orlando as money really well spent. She says that her ex-husband had promised and promised the trip to her son, but he never came through.

OCHOA: When you promise a kid to something, if you're a liar, the kids, they never want to trust you again.

MCCUNE: So Mariana Ochoa took her bonus from the government, and she made her own choices about what was valuable to her. She decided she needed to earn her son's trust and, therefore, she took him to Disney World. And she says it was worth it. She thinks that she was right. And four years later, her son is actually a freshman in college studying graphic design. And he's doing it in Orlando.

And he's living near Disney World?

OCHOA: He's living 50 minutes from Universal Studios (laughter) because this place captured his mind and then is magic for him.


TONY BENNETT: (Singing) When you wish upon a star, your dreams come true.

JOFFE-WALT: All right. Thank you so much for listening. Marianne, it's great to have you on the show.

MCCUNE: It's great to be with you guys.

JOFFE-WALT: You can let us know what you think about the earned income tax credit, about any other tax issues or anything at all that you hear at PLANET MONEY, you can write us at planetmoney@npr.org. You can find us online - npr.org/money. I'm Chana Joffe-Walt.

MCCUNE: I'm Marianne McCune. Thanks for listening.


BENNETT: (Singing) No request is too extreme when you wish upon a star as dreamers do. Fate is kind. She brings to those who love the sweet fulfillment of their secret.

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