The purpose of the earned income tax credit (EITC) is to eliminate tax-relatedincentives to remain on welfare. It operates by reimbursing low-income workersfor income and Social Security tax withholdings that are not withheld fromwelfare payments. One persistent problem associated with the EITC is the largenumber of tax returns with EITC-related errors – referred to as the“error rate.” The inappropriate payments that flowed from thepublic treasury as a result of these errors are estimated at more than $10billion for 2006 alone.

President Bill Clinton and the Republican Congress battled in the mid-1990s overthe EITC's future. Republican President Gerald Ford signed the EITC into law in1975 in part to reduce “the welfare rolls,” but it was theRepublican Congress that wished to abolish the EITC and President Clinton whowanted to save it. The choice to reform or abolish the EITC depended on why theerror rate occurred and how readily the problem could be redressed.

The first theory to explain the error rate is that, because of the EITC’scomplexity, it is easy to make a mistake in calculating the credit. Forinstance, the Internal Revenue Service (IRS) informational booklet explainingthe EITC is more than fifty pages long and includes several worksheets. Thesolution for the problem of complexity would be to simplify the EITC to reduceerror rates. The second theory to explain the error rate is that it is theresult of taxpayer fraud. Under this theory, taxpayers want something fornothing, so they cheat and claim an EITC amount that they know they areineligible to receive. The solution to a problem based on fraud would be toincrease audits of low-income taxpayers to crack down on the fraud.