Timing Is Money: Does Lump-Sum Payment of Tax Credits Impact Household Finances?

Abstract

Earned Income Tax Credit benefit income is paid out in a lump-sum around tax time. We investigate whether household finances reflect the timing of payment. Using nationally representative, individual-level data on self-reported debt and savings, we search for differences in monthly behavior between EITC-eligible and -ineligible households. Eligible households reduce their outstanding debt by about half in the months when they are most likely to receive their EITC income, and are less likely to use unsecured debt; no similar pattern is apparent among ineligible families. We find limited evidence of intra-year patterns in savings behavior.

Keywords: EITC, household finance, savings, credit card debt

JEL Classification: H2, I3, J18