Bhargava, S., & Manoli, D. (2015). Psychological frictions and the incomplete take-up of social benefits: Evidence from an IRS field experiment. American Economic Review, 105(11), 3489-3529.
- The study’s objective was to examine the impact of complexity, program information, and stigma on the take-up rate of the Earned Income Tax Credit (EITC) among eligible taxpayers who had not previously claimed the credit.
- The authors conducted a randomized controlled trial, sending different combinations of materials to likely eligible taxpayers who had not previously claimed the EITC. They used tax data from the Internal Revenue Service (IRS) for tax year 2009.
- The study found that use of complex materials and a longer worksheet decreased the EITC take-up rate by 6 and 4 percentage points, respectively. Materials that displayed the potential tax credit amount increased the EITC take-up rate by 8 percentage points.
- The quality of causal evidence presented in this report is high because it was based on a well-implemented randomized controlled trial. This means we are confident that the estimated effects are attributable to the experimental mailings, and not to other factors.
Features of the Study
Many low-income taxpayers are eligible for the EITC, which must be claimed on tax forms submitted to the IRS each year. Eligibility for the EITC and the tax credit received, if eligible, depend primarily on the number of hours worked, total earnings, and number of dependents claimed by the taxpayer. The IRS sends taxpayers who are likely eligible for the EITC but do not claim it a notice alerting them of the EITC and a worksheet to claim the credit retroactively. Response rates to the mailing, and thus take-up of EITC, have historically been lower than desired.
The study’s objective was to examine the impact of different mailing materials on the EITC take-up rate among eligible taxpayers who did not respond to the first mailing. Through their collaboration with the IRS, the authors gained access to several years of tax data on EITC-eligible individuals. The authors manipulated three aspects of the mailing:
- The envelope. A control envelope had no messaging on it, while a treatment envelope was printed with the message, “Important—Good News for You (Importante—Buenas Noticias para Usted)” to test whether encouraging recipients to open the envelope would affect take-up.
- The worksheet: Each household received a worksheet assessing EITC eligibility.
- To test whether the length and complexity of the worksheet affected take-up, a simple version of the worksheet contained fewer eligibility screens than a more complex version.
- To test whether recipients’ perceptions of potential penalties affected take-up, half of the worksheets contained a headline assuring them that mistakenly reporting incorrect information would not result in a penalty (known as indemnification).
- The notice. Each household received a notice informing them of their potential eligibility for the EITC.
- To test whether the simplicity of the notice affected take-up, the authors compared a simple, single-sided notice with clear font and streamlined information to a more complex, two-sided notice. The complex notice was textually dense and repeated eligibility requirements that were also discussed in the worksheet.
- To test whether additional information affected take-up, a version of the notice contained information about size of benefit receipt while another version of the notice displayed information about the transaction cost, either noting that the worksheet could be completed in less than 60 or 10 minutes. To test whether general program information affected take-up, some notices included a one-page informational flyer explaining the formula for calculating benefit amount and describing program “myths and realities.”
- To test whether program stigma affected take-up, one version of the notice contained a message intended to reduce personal stigma, “You may have earned a refund due to your many hours of employment,” and another version contained a message intended to reduce social stigma, “Usually, four out of every five people claim their refund.”
The 35,050 study participants were California residents who were likely eligible for EITC in tax year 2009, who did not claim an EITC benefit in tax year 2009, who had received a first reminder note about EITC, and who did not respond to the first reminder note. The authors conducted a randomized controlled trial by assigning participants to versions of the materials using three separate randomizations, one each for the notice, worksheet, and envelope. All study participants received some type of mailing. The authors estimated regression models to determine the impact of the various treatments on subsequent claiming of the EITC.
- Overall, 23 percent of taxpayers receiving the control mailing—the simple notice, simple worksheet, and plain envelope—responded to the mailing.
- Compared with the simple versions of the notice and the worksheet, the complex notice decreased the response rate by 6 percentage points and the longer worksheet decreased the response rate by 4 percentage points. These results were statistically significant.
- Compared with the simple notice alone, the simple notice plus a potential tax credit amount display increased the response rate by 8 percentage points. However, the simple notice plus informational flyer decreased the response rate by 4 percentage points. These results were statistically significant.
- Compared with the simple notice alone, the simple notice plus a note designed to reduce social stigma decreased the response rate by 4 percentage points. These results were statistically significant.
- There were no effects of providing estimates of the time required to complete the worksheet, indemnifying taxpayers against errors, the message on the envelope, or messages to reduce personal stigma on the EITC take-up rate.
Considerations for Interpreting the Findings
The study focused solely on EITC-eligible taxpayers who did not originally claim the EITC and who had not responded to a previous prompt to claim the EITC. Therefore, these results apply only to similar populations and should not be generalized to all taxpayers, or even all EITC-eligible taxpayers.
Causal Evidence Rating
The quality of causal evidence presented in this report is high because it was based on a well-implemented randomized controlled trial. This means we are confident that the estimated effects are attributable to the experimental mailings, and not to other factors.
Bhargava, S., & Manoli, D. (2013). Why are benefits left on the table? Assessing the role of information, complexity, and stigma on take-up with an IRS field experiment. Working paper.