Income Elasticity of Demand for Healthy and Unhealthy Foods: Evidence from Lump-Sum Earned Income Tax Credit Payments

The Earned Income Tax Credit is unique among social programs in that benefits are not paid out evenly across the calendar year but are received in a lump-sum cash payment. We exploit this feature of the EITC to investigate how receiving this influx of cash affects food expenditure patterns of eligible households. We find consistent evidence that households increase their spending on healthy foods such as fresh fruit and vegetables, meat and poultry, and dairy products when they receive their tax credit. Causal estimates of the spending response to this lump-sum payment are about twice as large as the cross-section variation in spending by income implies. By contrast, there is no measurable increase in spending on soft drinks including sodas and sports drinks, and evidence suggests that spending on soft drinks is relatively inelastic with regard to income.