Some of us dread tax day, but many Americans celebrate it. Perhaps surprisingly, the working poor often welcome that time of year. As Professor Sara Greene explains, a tax provision by the name of the Earned Income Tax Credit helps explain why. Hear Greene explain how the tax law can create “Christmas in February” with a critical lifeline for the working poor. Greene’s research focuses on understanding the relationship between inequality and the law and she shows why tax plays a key role not only in shielding the vulnerable but inviting them to participate in a central feature of American life. Greene also answers a pencil question from an article by Leigh Osofsky.
Sara Greene is a Professor of Law at Duke. She received her JD from Yale Law School and her PhD in social policy and sociology from Harvard University in 2014. Greene also practiced housing law and tax credit matters at the law firm Klein Hornig in Boston.
Greene’s areas of expertise include consumer bankruptcy and debt, poverty law, housing law, tax, contracts, access to justice, and qualitative research methods. Greene’s research uses interdisciplinary methods to better understand the relationship between law and inequality. Her work has been published or is forthcoming in the New York University Law Review, the Duke Law Journal, the Minnesota Law Review, and the American Bankruptcy Law Journal, among others. Greene, along with others, integrated her research on the Earned Income Tax Credit into a federal policy proposal, “The Rainy Day EITC: A Reform to Boost Financial Security by Helping Low Wage Workers Build Emergency Savings.” Senators Cory Booker (D-NJ) and Jerry Moran (R-KS) adopted the proposal and are co-sponsors of a bipartisan bill proposing the “Refund to Rainy Day Savings Act.”
Our student quote by B. John Williams is read by Kuan-Ting from Taipei, Taiwan.
Resources
Speaker 1:
All of us should be willing to pay whatever taxes are necessary to enable efficient government to improve or expand any essential services.
Speaker 2:
You have a beautiful tax return. The nicest one I've ever seen.
Speaker 3:
Okay folks, but remember your manners, no stampeding. Walk slow, like you do when you come to pay your taxes.
Steven Dean:
Hi, I'm Steven Dean. This is the Tax Maven. Here we are going to, in each episode, talk to our tax maven, who will be a person proving Archimedes's point that a single person with a lever long enough and a place to put it can change the world. The lever in this case is tax, and the place to put it is here at NYU Law.
Today's tax maven does something most tax experts rarely do. She talks to people. Her research focuses on people living in poverty. Part of that work has been talking to low-income taxpayers about what the tax law means to them. Much of what she finds is surprising. For many of the working poor, tax law is not something to be feared, but something to be celebrated, an essential part of being a hardworking American.
I'm Steven Dean, the Faculty Director of the Graduate Tax Program at NYU Law, and I'm here today with Sara Greene, Professor of Law at Duke.
So Sara, I know you don't consider yourself a tax person, but you seem to write a lot about tax. It's obvious it's something you're interested in. What interests you about tax?
Sara Greene:
I think what interests me about tax... I got started really talking to people who received the Earned Income Tax Credit [EITC]. And what interests me about tax is that it plays a significant role in the lives of people who are poor, especially the working poor, but they don't necessarily consider it tax in the way we in the law school think about tax, as something to study. They consider it as really a lifeline. Which is not how a lot of us, when we think about Tax Day, we think about, "Ooh, I might owe taxes," what do you owe to the government. But for people living in poverty, because of the EITC and other tax credits, they both see it as a lifeline and really a way that they are like other Americans, that they are like the middle class.
And so I see it as really this interesting... Tax as a sort of interesting thing that people think about in different ways, and plays a significant role in the lives of lower-income people. And I study people who live in poverty, and so that's how I got interested in it.
Steven Dean:
Sounds perfectly natural. And as a lot of folks will know, the EITC, the Earned Income Tax Credit, is essentially a wage subsidy for low-wage workers. And of course, like a lot of tax provisions, it can be a little complicated. But it certainly is an important feature of the law for a lot of people. And maybe one of the most important features of the law for a pretty big segment of the population.
Sara Greene:
Right. And what's interesting is it's a wage subsidy, but when I spoke to 150, 200 recipients of the EITC, they don't think of it as a wage subsidy. They think of it as just a tax credit, is what they call it. Some people get tax credits because they pay mortgages. Some people get tax credits because they use solar powered cars. And so to them, it's just being American, getting a tax refund. And that was what was so interesting. So many people, when I said, "Tell me about Tax Day," many people said, "Thank God for Tax Day. Tax Day is like Christmas." Many, many people said, "Christmas in February," I heard over and over again.
But they don't think of it as, "I get this because my income is low." They think of it as, "I get this because I work and everybody gets some amount of a tax refund," in their mind, "and this is just what I get because I work hard." And that's what I found very interesting. "This is what I get because I work hard, but also I need this. And this is the only way I get through the year. This is the way I pay down my debt. This is the way I buy my children uniforms for school. I depend on this."
Steven Dean:
For hardworking Americans living in poverty, even a relatively small tax credit can make a big difference.
Sara Greene:
So I think for people who receive the EITC, there's a whole group post-welfare reform that Kathy [Edin] and others have written about who are not working. But if you take out that group, for people who are working, who are receiving the EITC, and I spoke to families with children. So they were... Everyone who qualified for my study were receiving $2,000 or more. So they were receiving significant tax refunds. And for them, this was really a way it did encourage work. And a lot of them had been on welfare previously, and they really contrasted the way they felt receiving a tax refund to being on welfare.
And a lot of them, in sociology we call it creating boundaries. So a lot of them talked about other people who had been on welfare and sort of said, "Some of them were cheating, some of them had drug issues. But for me, something happened like my daughter needed heart surgery and so I had to stop working that time I received welfare, but it was really intrusive. Caseworkers were coming to my house all the time. I felt like the government was watching me." A lot of people said, "I am never going back to that. No matter what I do, I don't want to receive welfare again, but working and receiving this tax credit, this is great." And people talked about, most people would use the tax credit for, as I said, paying down debt. But a lot of them would reserve a small amount of money for things like buying their child Disney bedding, or something to make their child feel like... Even using it for money for the ice cream truck. So small amounts, but something to make them feel like they were middle-class.
Steven Dean:
From your work, are there lessons you've learned about the EITC that could help policymakers make it even better?
Sara Greene:
Yeah. So I think one thing I learned is that what a lot of people were doing is over the course of the year, they would experience financial shocks. So we've been hearing about this in the news, so something would happen, they would lose their job, a child would get sick. So maybe they would take a week off in the hospital and then get fired because they're working in the service industry where you can't just take off some number of days. Even just a car repair.
And so then they would use credit cards. Credit cards as a way to get through. So if they lost some income, they would use credit cards essentially as a safety net, because there really wasn't any other safety net when they were working. And then whatever they charged, the interest would compound, they wouldn't be able to pay it back right away. And so they were charging up huge amounts of debt. They had all this debt that they had to pay down, using credit cards.
So then when they got their EITC, their initial plan, because we gave them a survey, would be to save some of it, which is what policy-makers want. They had dreams of their children going to college, moving to better neighborhoods with better schools. But then the reality hit when they received it and they had all this debt. So then they paid down the debt. A lot of it was interest and fees on credit cards. And so one program, I think, there are different things you could do, but one thing you could do is automatically have some amount of the EITC saved into some kind of fund where people could access it if they needed it, but it would be there as a kind of savings mechanism.
And then also, if four months into the year they needed some money, it was in that savings account for them. So I think that's one thing. It used to be that you could opt in to get the EITC monthly, but I think it was less than 1% of people did that. This is slightly different, where people really liked the lump sum, and they sort of used it as a savings mechanism for themselves, for savings. But then when they got it, they felt like they had to spend it on their debt. So some way to kind of have it be more of a safety net or a savings account, I think would be useful.
Steven Dean:
It's interesting, because people again respond in unexpected ways to programs, including the EITC, and it sounds like this is a way to make that work for people rather than against them. That's sort of the trick, I guess, making sure that people's psychological quirks are used in their own favor? I-
Sara Greene:
Right. I think so. People would talk about more... Many of the people we interviewed talked about "claiming zero," is what they called it. And they would say this again and again. So they would purposely "claim zero." So put down fewer dependents so that more was saved, because they saw it as forced savings. And a lot of them were unbanked. They had had bad experiences with banks, with overdraft fees, that sort of thing. So they didn't use banks as savings accounts, they used check-cashing places. So this was almost a way of creating their own savings account throughout the year and then getting the money when they need it. Which on one hand doesn't seem rational because then you're using a credit card, right? But on the other hand, for them, they felt like that worked, because then at a certain point in the year, at least, they had this money.
Steven Dean:
Professor Greene's work has helped her see the impact of tax law on Americans living in poverty. Sales taxes can have a big impact on inequality, and that's no accident.
Sara Greene:
One area that's at least under-explored, let's say that, is the role of state and local taxes. I think a lot of times when tax people write about tax and inequality, they focus on federal law, they think about how can we make tax more progressive. We've talked about the wealth tax on a federal level recently in the news, but state and local tax matter a lot. So for example, there are states that have no income tax. So on its face that might look great for anyone, even low-income people. Great, they get to keep all of their income. But what happens is in a lot of those states, and this is based on work that Katherine Newman has done and others, in a lot of those states, they actually have very high sales tax.
And that's how, in some sense, they're making up for the lack of income tax or a lower income tax. And so for people who are low-income, that sales tax is a higher percentage of their income when they're buying goods and services than someone who is wealthier. And so if they buy a washing machine, and let's say it's $500 and then there's an 8% tax, that's significant for them. And when you add that up as a proportion of their income, that's actually high. So if someone living, particularly Southern states tend to have high sales taxes. And so someone living in Mississippi, who's living in poverty, has one or two children, is sometimes making $2,300 less than the same person living and working in a Northern state. That matters. That matters when you're living paycheck-to-paycheck.
Steven Dean:
And you note that it hasn't always been that way historically.
Sara Greene:
Right. So this kind of goes back to post-slavery Reconstruction. During that time, once slavery was over and there were a lot of people who needed support, didn't own land. We started seeing higher property taxes. When that happened, white land owners, plantation owners did not like that. And so they advocated against it, they got people into the legislature to try to change this fairly quickly. And they put clauses in the Constitution to make it supermajority, clauses to make it so that the lower tax rates, which they got, property tax rates would stay. But then states had to find a way to make up for that when you have lower property taxes. One way they did that was to instill sales taxes. So first, you would see the first sales tax, and then that kind of took over. California, other states have had that issue as well.
Steven Dean:
Well, it's interesting because people don't often think of property taxes as progressive, but I guess it's all relative.
Sara Greene:
Right. And there are issues with property taxes and gentrification, people can't afford them and move out. So it depends how you think about it. But if you think about it, people who have wealth tend to own more property, more expensive property, they owe a greater share. And particularly if you think... We're in New York City right now. Who owns property in New York City? Most low-income people don't. And so taxing property is a way to redistribute.
Steven Dean:
With debt and social programs, Professor Greene notes that Americans living in poverty tend to make fine distinctions between those they see as fair and unfair. In her experience, tax tends to be seen differently, in part because of the tax law's complexity.
Sara Greene:
There's certain debt that they feel a responsibility to pay back. And there are also certain debts that they try to pay back because they see it as a path towards home ownership, to essentially upward mobility. There are other debts that they think either, "I wasn't really responsible for that," or, "I was tricked." That happens a lot. And so they're less likely to pay back that debt. With social welfare programs, they know, "I receive welfare because I'm poor. I receive food stamps because I'm poor." And with taxes, I think it's more of a black box, where they don't really understand tax. A lot of them when we ask them with the EITC, for example, "What do you think you'll receive next year?" They don't know. They just say, "I pray to God that I do receive something." So I think that's what's interesting about using tax as a mechanism for potentially redistribution, for elevating people out of poverty, that they actually don't think about. Very few people I've talked to really think about the sales taxes as unfair. They don't think about it at all.
Steven Dean:
I have one more question for you. If you get it right, I'm going to give you this lovely NYU Law Graduate Tax Program pencil. The stakes are high. The stakes are high. And so again, I know you're not a tax person, so in a way, this is a totally unfair question, but I'm going to ask it anyway. In the tax law, one of the reasons people don't understand tax law, and some of the folks you've talked to you find it somewhat of a black box, is our love of odd phrases. So I'm going to read you a sentence from an article by Leigh Osofsky, Who's Naughty and Who's Nice? Frictions, Screening, and Tax Law Design, and I'm going to let you... I'm going to give you three choices, and you can maybe tell me what you think the phrase is that goes in the missing spot.
So the blank rule uses sale and repurchase of substantially identical stock within a short period of time, as likely correlated with and therefore indicative of tax planning motivation. And the three choices are the round the world rule, the down under rule, or the wash sale rule.
Sara Greene:
The wash sale rule, because it sounds unusual.
Steven Dean:
That is correct. You got it right. So you are... You denied being a tax person, but now we have total proof that you are an absolute tax person.
Sara Greene:
Clearly. Thank you, great, pencil. Purple's my favorite color.
Steven Dean:
Is it really?
Sara Greene:
Yeah.
Steven Dean:
That's fantastic. So thank you so much, Sara, for joining us today. Thank you for listening to the Tax Maven. And I also want to give a very special thank you to those that helped make the podcast possible. Patrick Kelly, Joe Rivera, Greg Addison, Rebecca Carmichael, Jill Rachlin, and Anthony Pietrangelo. And thank you, Rachel Burns.
The NYU Law Graduate Tax Program has been the premier place to learn about tax law for the past 75 years, so please visit us on the web, visit our graduate tax program website, to see the different programs we offer both in person and online, both for lawyers and non-lawyers. Take a look at what we offer, and I hope you consider joining us. And now we like to end each of our episodes with a quote about taxes read by one of our students. Today's student quote will be read by Kuan-Ting from Taipei, Taiwan. It's a quote from B. John Williams, and it's taken from "100 Years of the Tax Code: 100 Tax Quotes", compiled and arranged by Jeffery L. Yablon, that was published in Tax Notes.
Kuan-Ting:
"The tax system touches more people in this country than any other part of the government or our laws. The loss of confidence in its integrity is the loss of confidence in the government itself."
Steven Dean:
Please email us at info@taxmavenpodcast.com if you have any questions or comments or suggestions. And if you are a student and want to email us a recording of your favorite tax quote, please email it there as well. Thanks for tuning in.