The Earned Income Tax Credit has the good intention of subsidizing the employment of poor people. A huge amount of it, though, is fraud, because the penalties and the chances of getting caught are small.
Raj Chetty gave the Ely Lecture at the AEA meetings in Boston in January 2015, and it was well worth listening to. He is very clear in his presentation, and he chooses interesting research topics. One paper he talked about was about how the Earned Income Tax Credit leads to a sharp bunching of people’s reported self-employment income at the level where the check from the government is highest— $12,600, I think, at some point in time, with a ehceck of about $500 if you report no children, $3,000 for one, and $5,000 for two (http://www.foxbusiness.com/personal-finance/2014/05/29/cutting-down-on-tax-fraud-understanding-eitc/). That differs between states, though. In 1996, there was a lot of bunching in Texas, but not much in Indiana. By 2008, Indiana had a lot more. Chetty calls this information diffusion, but he really should make clear that this is diffusion of information about how to defraud the government, since the best explanation is the spread of fraud, both from tax preparers and from people who buy the social security numbers of other people so as to file fraudulent returns for them. I wonder how much organized crime is involved. This seems to be a substantial incentive for poor people to have children, though it’s probably easier just to claim children and not actually have to take care of them.