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Householder response to the earned income tax credit: path of sustenance or road to asset building

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Author Info
Sherrie L.W. Rhine
Sabrina Su
Yazmin Osaki
Steven Y. Lee
Abstract

This study seeks to gain a more complete picture about how the Earned Income Tax Credit program influences consumer expenditure and saving decisions. Based on survey data collected from over 18,000 taxpayers participating at the Volunteer Income Tax Assistance sites administered by the Community Food Resource Center, a nonprofit organization in New York City, we find that a fairly large proportion of lower-income taxpayers expect to use the majority of their refund for the purpose of paying debt and other more immediate expenses. Even so, almost 11 percent of these taxpayers reported that they would save a majority of their refund. ; The results from the empirical investigation determine that unbanked taxpayers are significantly more likely to open a low-cost savings account and that opening an account is positively related to the size of the refund. Evidence is also offered to show that nonprofit organizations can and do play an important role in helping to move lower income consumers into the financial mainstream and potentially facilitating asset-building behavior. This study helps inform policy by contributing to the growing body of literature about programs that encourage participation in the financial mainstream.

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Article provided by Federal Reserve Bank of Chicago in its journal Proceedings.

Volume (Year): (2005)
Issue (Month): Apr ()
Pages:
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Handle: RePEc:fip:fedhpr:y:2005:i:apr:x:8

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Keywords: Households Income tax

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References listed on IDEAS
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  1. V. Joseph Hotz & Charles H. Mullin & John Karl Scholz, 2001. "The Earned Income Tax Credit and Labor Market Participation of Families on Welfare," JCPR Working Papers 214, Northwestern University/University of Chicago Joint Center for Poverty Research. [Downloadable!]
  2. Christofides, Louis N. & Stengos, Thanasis & Swidinsky, Robert, 1996. "On the Calculation of Marginal Effects in the Bivariate Probit Model," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH.
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  3. Timothy M. Smeeding & Katherin Ross Phillips & Michael O'Connor, 2000. "The EITC: Expectation, Knowledge, Use and Economic and Social Mobility," JCPR Working Papers 139, Northwestern University/University of Chicago Joint Center for Poverty Research.
  4. Keane, Michael & Moffitt, Robert, 1998. "A Structural Model of Multiple Welfare Program Participation and Labor Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 553-89, August.
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  5. V. Joseph Hotz & John Karl Scholz, 2001. "The Earned Income Tax Credit," NBER Working Papers 8078, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Bruce D. Meyer & Dan T. Rosenbaum, 2001. "Welfare, The Earned Income Tax Credit, And The Labor Supply Of Single Mothers," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 1063-1114, August. [Downloadable!] (restricted)
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  7. Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, vol. 89(4), pages 947-958, September. [Downloadable!] (restricted)
  8. Nada Eissa & Hilary Williamson Hoynes, 1998. "The Earned Income Tax Credit and the Labor Supply of Married Couples," NBER Working Papers 6856, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Thaler, Richard H, 1990. "Saving, Fungibility, and Mental Accounts," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 193-205, Winter. [Downloadable!] (restricted)
  10. Eissa, Nada & Liebman, Jeffrey B, 1996. "Labor Supply Response to the Earned Income Tax Credit," The Quarterly Journal of Economics, MIT Press, vol. 111(2), pages 605-37, May. [Downloadable!] (restricted)
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  11. anonymous, 1999. "Banking relationships of lower-income families and the governmental trend toward electronic payment," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jul, pages 459-473. [Downloadable!]
  12. William H. Greene & Sherrie L.W. Rhine & Maude Toussaint-Comeau, 2003. "The importance of check-cashing businesses to the unbanked: racial/ethnic differences," Working Paper Series WP-03-10, Federal Reserve Bank of Chicago. [Downloadable!]
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