Policy Research

The Role of Earned Income Tax Credit in the Budgets of Low Income Families

Ruby Mendenhall, Kathryn Edin, Susan Crowley, Jennifer Sykes, Laura Tach, Katrin Kriz, Jeffrey R. Kling

Summary

The article attempts to analyze the ways that individuals who receive the Earned Income Tax Credit (EITC) allocate their resources. The study compares 194 interviews of families in Champagne and Boston both before they receive their credit and after. The study finds that upon receiving the EITC 84 percent of households used part of the credit to pay off debts, primarily credit cards and bills. Another primary use was basic consumption such as groceries. This is evidence that people primarily use the EITC as a measure of financial stability. The study also found that 57 percent of people surveyed had plans to allocate part of their credit towards asset accumulation and social mobility. This number was significantly lower in realization with only 39 percent using money for this cause. The estimated reason for this discrepancy is unanticipated shocks to income which the EITC helps families’ safe-guard against. Further the study finds that most families receiving the credit have long-term plans of social mobility in which future credits play a significant role.

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Policy Implications

This article can be used in analyzing the Earned Income Tax Credit and other cash transfer program, and attempting to modify them to obtain preferred results. The surveys indicate that many families have plans of upward mobility in the months before the credit; however more of them end up using it for consumption and debt repayment in actualization. Given this info policy that assists families in investing or saving their tax returns may be useful and see significant results. The desire of families to invest their credits is further evidenced by the fact that when given a choice 97 percent of credit eligible families preferred to receive their credit in an annual lump sum as opposed to monthly installments. When asked why this was most respondents liked the potential for significant savings the credit offered when given in a lump sum.