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The Impact of the Earned Income Tax Credit on Household Finances

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  • Lauren E. Jones
  • Katherine Michelmore

Abstract

Using a simulated instrument strategy, we analyze how expansions to the federal and state Earned Income Tax Credits (EITC) affected household finances over the past two decades. Using data from the Survey of Income and Program Participation wealth topical modules, we also test whether responses differ over time, as well as whether there are different responses to the federal and state expansions, and how responses vary by educational attainment. A $1,000 policy†induced increase in the average household EITC leads to a 3 percentage point increase in the likelihood of holding money in a savings or checking account, and approximately $700 more held in savings balances. These results are coupled with large increases in pre†tax family earnings. We also find some evidence of decreases in unsecured debt holdings. We interpret these results as further evidence that the EITC increases the financial stability of low†income single mothers.

Suggested Citation

  • Lauren E. Jones & Katherine Michelmore, 2018. "The Impact of the Earned Income Tax Credit on Household Finances," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 37(3), pages 521-545, June.
    • Handle: RePEc:wly:jpamgt:v:37:y:2018:i:3:p:521-545
    DOI: 10.1002/pam.22062
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    Cited by:

    1. Lauren E. Jones & Kevin Milligan & Mark Stabile, 2019. "Child cash benefits and family expenditures: Evidence from the National Child Benefit," Canadian Journal of Economics, Canadian Economics Association, vol. 52(4), pages 1433-1463, November.
    2. O. Kondratjeva & S. P. Roll & M. Despard & M. Grinstein-Weiss, 2022. "The Impact of Tax Refund Delays on the Experience of Hardship Among Lower-Income Households," Journal of Consumer Policy, Springer, vol. 45(2), pages 239-280, June.
    3. Dylan J.F. Bellisle, 2024. "Neoliberalism and Anti-poverty Tax Policy: How Single Mothers Negotiate Tax Filing and the Use of the Earned Income Tax Credit with Their Young Adult Children," Journal of Family and Economic Issues, Springer, vol. 45(2), pages 369-380, June.
    4. Nicardo S. McInnis & Katherine Michelmore & Natasha Pilkauskas, 2023. "The Intergenerational Transmission of Poverty and Public Assistance: Evidence from the Earned Income Tax Credit," NBER Working Papers 31429, National Bureau of Economic Research, Inc.
    5. Jonathan Fisher & David H. Rehkopf, 2022. "The Earned Income Tax Credit as supplementary food benefits and savings for durable goods," Contemporary Economic Policy, Western Economic Association International, vol. 40(3), pages 439-455, July.
    6. Anuj Gangopadhyaya & Fredric Blavin & Breno Braga & Jason Gates, 2020. "Credit where it is due: Investigating pathways from earned income tax credit expansion to maternal mental health," Health Economics, John Wiley & Sons, Ltd., vol. 29(9), pages 975-991, September.
    7. Otto Lenhart, 2023. "The earned income tax credit and food insecurity," American Journal of Agricultural Economics, John Wiley & Sons, vol. 105(5), pages 1543-1570, October.
    8. Natasha V. Pilkauskas & Katherine Michelmore, 2023. "Who’s Caring for the Kids? The Earned Income Tax Credit and Childcare Arrangements," The ANNALS of the American Academy of Political and Social Science, , vol. 706(1), pages 37-64, March.
    9. Elliott Isaac, 2020. "Marriage, Divorce, and Social Safety Net Policy," Southern Economic Journal, John Wiley & Sons, vol. 86(4), pages 1576-1612, April.
    10. Karen Z. Kramer & Flávia Cristina Drumond Andrade & Andrew J. Greenlee & Ruby Mendenhall & Dylan Bellisle & Renee Lemons Blanks, 2019. "Periodic Earned Income Tax Credit (EITC) Payment, Financial Stress and Wellbeing: A Longitudinal Study," Journal of Family and Economic Issues, Springer, vol. 40(3), pages 511-523, September.
    11. Taryn W. Morrissey, 2023. "The Earned Income Tax Credit and Short-Term Changes in Parents’ Time Investments in Children," Journal of Family and Economic Issues, Springer, vol. 44(2), pages 412-433, June.
    12. J. Michael Collins & Amrita Kulka, 2023. "Saving by buying ahead: stockpiling in response to lump‐sum payments," Fiscal Studies, John Wiley & Sons, vol. 44(4), pages 451-484, December.
    13. Bastian, Jacob E. & Black, Dan A., 2024. "Relaxing financial constraints with tax credits and migrating out of rural and distressed America," Journal of Public Economics, Elsevier, vol. 234(C).
    14. Elliott Isaac, 2018. "Marriage, Divorce, and Tax and Transfer Policy," Working Papers 1810, Tulane University, Department of Economics.
    15. Kimberly McErlean & Jennifer L. Glass, 2024. "How Do Households Fare Economically When Mothers Become Their Primary Financial Support?," Journal of Family and Economic Issues, Springer, vol. 45(2), pages 395-409, June.
    16. Braga, Breno & Blavin, Fredric & Gangopadhyaya, Anuj, 2020. "The long-term effects of childhood exposure to the earned income tax credit on health outcomes," Journal of Public Economics, Elsevier, vol. 190(C).
    17. Braga, Breno & Blavin, Fredric & Gangopadhyaya, Anuj, 2019. "The Long-Term Effects of Childhood Exposure to the Earned Income Tax Credit on Health Outcomes," IZA Discussion Papers 12417, Institute of Labor Economics (IZA).
    18. Natasha Pilkauskas & Katherine Michelmore, 2019. "The Effect of the Earned Income Tax Credit on Housing and Living Arrangements," Demography, Springer;Population Association of America (PAA), vol. 56(4), pages 1303-1326, August.
    19. Lauren E. Jones & Guangyi Wang & Tansel Yilmazer, 2022. "The long‐term effect of the Earned Income Tax Credit on women's physical and mental health," Health Economics, John Wiley & Sons, Ltd., vol. 31(6), pages 1067-1102, June.
    20. Mari, Gabriele & Keizer, Renske, 2020. "Families of Austerity: Welfare Cuts and Family Stress in Britain," SocArXiv vdej8, Center for Open Science.

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