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Writing About Reform: A Conversation With Michelle Lyon Drumbl

Posted on June 23, 2020

Professor Michelle Lyon Drumbl’s work and leisure are both filled with strategy. Between teaching tax to law students, coaching children in chess at Lexington, Virginia’s elementary school, and pursuing the optimal structure for the earned income tax credit in her recent book, she spends her personal and professional time working through thought-provoking challenges.

The Road to Tax

Drumbl’s experience in the basic federal income tax class in law school piqued her interest in the field. “I loved the course and its examination of why we structure the revenue system the way we do,” she said. In her third year, she took every tax class she could, and decided that she was particularly drawn to the idea of working with individuals, as opposed to entities. Following law school, Drumbl chose to work at a small law firm in Little Rock, Arkansas, where she could assess whether tax was the right field of practice before heading to New York University for an LLM in tax.

After graduating, Drumbl joined the IRS Office of Associate Chief Counsel (International) for three years, where she worked on treaty interpretation and letter rulings on expatriation. Before the American Jobs Creation Act of 2004 changed section 877 to remove the requirement that an expatriating individual have a principal tax avoidance purpose and eliminated the ruling procedure, Drumbl worked on evaluating letter ruling requests to determine whether an individual’s expatriation was tax motivated. That treaty interpretation work appealed to her, and she valued her coworkers. “My favorite thing about being at Counsel was my colleagues,” she said. “People at Counsel really love thinking about the issues they’re working on.”

While at the IRS, Drumbl began teaching international tax as an adjunct professor at Washington and Lee University School of Law, where she discovered that she loved teaching. The timing was serendipitous. The school was expanding its program for third-year students to include more clinics and experiential learning, but the existing offerings were all litigation- and courtroom-focused. Drumbl pitched the idea of starting a tax clinic and became the program’s founding faculty member. Twelve years later, she’s the clinic’s director, and the program has met with success in terms of both student enrollment and use of its services by the local community.

EITC Work and Publishing a Book

Drumbl’s work directing the low-income taxpayer clinic led directly into her recent major project — writing her first academic book, Tax Credits for the Working Poor: A Call for Reform, which was published last year. In it, she provides the contours of a plan to ensure that the EITC continues to benefit the low-income taxpayers and their families who need it while balancing administrative and public opinion considerations.

Michelle Lyon Drumbl, Director of the Tax Clinic and Clinical Professor of Law, Washington and Lee University
Michelle Lyon Drumbl, director of the tax clinic and clinical professor of law, Washington and Lee University (Michelle Lyon Drumbl)

The EITC is an important anti-poverty program, and in her book Drumbl emphasizes that it must be retained, but explains that it should be bolstered through substantive and conceptual changes that would help convey a clearer policy both to the general public and to recipients. “The EITC has lost its coherence, to the extent it ever had any,” she wrote. While it ostensibly began as a credit to encourage work and alleviate the impact of Social Security taxes, over its 45-year history, it has transformed into primarily an anti-poverty program for families with children. That’s not a bad outcome, but it provides a reason for reworking the way the credit is delivered and reconciling it with the child tax credit, Drumbl explained.

Through her clinical work, Drumbl found that delivery of the credit and its administration sometimes left clients in need waiting for long periods to receive money they were entitled to. “There is lots of good scholarly work on the EITC from an economic perspective, but not everybody gets to view it through the eyes of recipients, particularly those who are having a problem with it,” she said.

Drumbl said her work with the clinic has had a personal as well as professional impact. Clients’ stories of how much the credit has affected their lives have helped her see through others’ eyes in a way she might not have otherwise, she said. That experience made her want to figure out how to improve the EITC so that it worked better and made more sense for recipients, the IRS, and the general public. “The book was a chance to synthesize observations about how we administer the EITC and the choice to do that through the IRS,” she said.

One of the proposals in the book is to split the EITC in two so that it continues to provide an incentive for working and an anti-poverty supplement. The latter should be delivered separately from any tax refund to the extent that it’s paid as an income supplement to a taxpayer with one or more qualifying children, she said.

A novel addition to EITC scholarship is the inclusion of comparisons to New Zealand and Canada, both of which adopted programs similar to the EITC and child tax credit. Drumbl said those country studies were inspired by a conference she attended in Australia, where a participant from New Zealand asked her why the United States was still delivering the EITC as an annual lump sum.

Although the full programs in place in Canada and New Zealand probably shouldn’t be directly imported to the United States, each has interesting elements that Congress could draw from in reconfiguring the American credit, Drumbl said. In particular, she said it’s worthwhile to look at other countries’ experiences focusing on caregivers and directing the benefits to children. “I wish we could make this conversation about the benefits children are getting from” the EITC, she said, noting that empirical work shows that the EITC succeeds as a measure to help children.

One aspect of the New Zealand and Canada programs that appealed to Drumbl is splitting the credit between caregivers, rather than awarding the full credit to the caregiver with whom the child spends the most time. The zero-sum nature of the EITC encourages parents to trade off claiming the credit from year to year, regardless of where the child actually lives, Drumbl noted. She said splitting the credit when, for example, a child lives with one parent for at least a third of the year would better match the reality of family structures.

Drumbl acknowledged that there would be questions if the United States moved to such an approach, such as how to split the credit when the caregivers have unequal incomes, but she said administrative mechanisms already in place allow the United States to administer a split credit. “It could send a signal that caretaking and having shared custody is valued and that we want to support children in those circumstances,” she said. New Zealand’s approach also pays the credit to the caregiver and not the worker.

Drumbl said the question whether to spread out EITC payments is challenging, but should be seriously considered by Congress. The United States has experimented with distributing the payments throughout the year, but recipients largely didn’t use that option because it resulted in small amounts being added to paychecks weekly or biweekly.

Still, consumption-smoothing benefits might be gained if the EITC were distributed less frequently, such as quarterly, Drumbl said. “That would give recipients steady access to more meaningful amounts of money throughout the year,” she said. The lump sum approach has downsides beyond failing to provide for consumption smoothing and increasing the likelihood that recipients go through annual cycles of debt. It makes secondary problems such as return preparer fraud and identity theft more likely, Drumbl said.

Tax Credits for the Working Poor – Book Cover
Tax Credits for the Working Poor: A Call for Reform (Cambridge University Press)

If Congress adds a quarterly option or moves entirely to quarterly payments, the EITC could be based on the current year’s estimated income, Drumbl said. That would require an administrative mechanism for taxpayers to report changes to their income. “We could look to the premium tax credit for costs associated with that,” she said, noting that self-certification would be less expensive administratively than traditional welfare. Basing payments off the previous year’s earnings would be easier to administer, but then overpayments would have to be addressed. “There are trade-offs in any direction,” Drumbl said.

How to protect EITC recipients from owing at the end of the year is an important question, she said. “People are terrified of having to pay it back,” Drumbl said, adding that a hybrid approach based on prior- and current-year earnings could reduce the likelihood that recipients end up in financial difficulty.

One option is to add a safe harbor threshold to protect EITC recipients from having to repay overpayments or have them withheld from future payments. A safe harbor could also be designed so that if a recipient must give back some or all of the overpayment, it could be done more gradually to blunt the impact, Drumbl said. She added that she would particularly like to see at least part of the EITC payments protected through a safe harbor, which is consistent with the conceptualization of the EITC as an anti-poverty program.

Drumbl said one of her objectives in writing the book was to help foster public understanding of the importance of the EITC to recipients. The book is dedicated to her clients and was inspired by the difficulties they face. “Many times people don’t even know they have a problem [in claiming the credit] until they find themselves with no refund, and then it becomes a crisis moment,” she said. Drumbl said she might later write more extensively on the impact of conceptualizing the EITC as an anti-poverty program, and whether that means it should be separated from the tax refund process.

Checkmate!

When Drumbl’s oldest child was a kindergartner, her Washington and Lee colleague Robert T. Danforth encouraged her to join the chess club he had started at the local elementary school in Lexington. “I hadn’t played much since I was a kid, but Bob was excited about having a female role model for the chess club,” she said. Both of her sons have participated in the club over the past seven years, and Drumbl says helping teach chess to young students is a highlight of her nonworking hours. “It’s been a joy,” she said of the activity on which she spends the most time outside the law school.

Coming Soon

Drumbl’s current research is into the use of social media as an enforcement tool. Although IRS employees aren’t permitted to look at taxpayers’ social media accounts, the IRS announced in 2018 that it was considering ways to use private vendors to gather information on social media to use in existing cases. Drumbl said she’s concerned that that might have a disproportionate effect on low-income taxpayers. Even if the IRS can review social media accounts, or have a vendor do it, “there are good reasons not to go after those easy pickings,” she said. She also plans to explore other risks of doing so, particularly that the information might be inaccurate.

Another area Drumbl will work on soon is return preparer regulation and the lessons that can be gleaned from the states’ regulation of preparers. That’s familiar territory for her. In a 2014 Tax Notes article, she examined the possibility of applying the ethical rules in Circular 230 to return preparers and the beneficial effect it could have on low-income taxpayers.1 There’s now more information available from the states’ regulatory efforts, and the lessons from them could be helpful if Congress takes another run at federal regulation, Drumbl said.

FOOTNOTES

1 See Michelle Lyon Drumbl, “When Helpers Hurt: Protecting Taxpayers From Preparers,” Tax Notes, Dec. 22, 2014, p. 1365.

END FOOTNOTES

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