The EITC: Expectation, Knowledge, Use, and Economic and Social Mobility

Abstract

This paper presents initial findings on the economic impact of the Earned Income Tax Credit (EITC) based on a sample of Chicago area households that filed tax returns in the spring of 1998. Respondents reported on their detailed use of the funds to pay bills, purchase new items, or save. Asset information on the households was also gathered, along with questions regarding the ability of households to make particular expenditures without the help of the EITC. Uses of the EITC are divided into those that improve social mobility (e.g., purchase a car, pay tuition, change housing) and those that primarily help to make ends meet (e.g., pay routine bills, purchase food) and determinants of each are explored in a regression framework. The paper also explores the relationship among the financial system, asset and borrowing status, and EITC usage. Implications for tax policy and social policy are drawn in conclusion. As far as we know, this is the first research to address these issues, despite the fact that, excluding programs for the elderly and Medicaid, the EITC is our largest federal entitlement program.

JEL Classification: D13, I38