The field of tax expenditure analysis has generally assumed a binary choice between tax expenditures and direct outlays. Because tax expenditures have multiple traits that are said to render them a suboptimal spending mechanism, scholars have tended to argue that they should be eliminated outright, or that they should be recast as direct expenditures. But despite such arguments, tax expenditures have proven to be a resilient (and politically popular) part of the American policy landscape, and in recent decades they have expanded in both number and size. This remarkable staying power suggests that tax expenditure analysis may do well to shift its focus from outright elimination to reforms that remedy or mitigate tax expenditures’ more problematic attributes.
This Article uses a case study of the Earned Income Tax Credit (EITC) to explore one particularly promising target for such reforms: the administration of tax expenditures. Scholars have long contended that the EITC’s high rate of noncompliance (i.e., payments made to ineligible taxpayers) shows that the tax system is a flawed platform for the administration of complex programs with real-world goals unrelated to revenue collection. But such critiques have generally assumed that, regardless of their policy objectives, tax expenditures will be implemented with the same administrative tools used for revenue collection. This Article argues that tax expenditures need not rely on unmodified tax administration, but rather that policymakers can address the tax system’s administrative limitations by implementing “hybrid” administrative practices borrowed from nontax arenas. It illustrates this analytical approach by examining the adjudication of EITC noncompliance in the United States Tax Court. Currently, those suspected of EITC noncompliance are expected to vindicate their claim for the credit via the same formal, adversarial Tax Court procedures used to adjudicate claims of tax underpayment. But as an analysis of EITC claims in Tax Court reveals, such ordinary tax procedures are not well-suited for the EITC context, which features low-income and usually unrepresented taxpayers who are poorly positioned to vindicate their claim in a formal, adversarial setting. Policymakers should thus consider deviating from traditional tax administration and, in recognition of the EITC’s welfare objectives, adopting the collaborative, inquisitorial adjudicative approaches associated with traditional welfare programs. Such hybrid practices would better reflect the EITC’s objectives and clientele, and could significantly improve the fairness and efficiency of EITC adjudication.
And what’s true for EITC adjudication is true also for other aspects of the EITC, as well as for tax expenditures more generally. Where a tax expenditure has a real-world objective not well-served by traditional tax administration, administrative practices that are specifically tailored to reflect that objective will improve policy outcomes. This Article thus concludes by illustrating the broad potential of hybrid tax administration, tentatively identifying a number of opportunities for the use of hybrid administrative practices to improve both the EITC and other tax expenditures.