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Timing Is Money: Does Lump-Sum Payment of Tax Credits Induce High-Cost Borrowing?

35 Pages Posted: 10 Jan 2016 Last revised: 27 Dec 2016

Lauren Eden Jones

The Ohio State University

Katherine Michelmore

University of Michigan at Ann Arbor; Syracuse University

Date Written: January 8, 2016

Abstract

We use the Survey of Income and Program Participation to analyze the impact of the expansions of the Earned Income Tax Credit on household savings and high cost debt. Results suggest that increases in tax credit generosity are associated with increases in household savings and high-cost debt. We investigate whether these increases are due to consumption smoothing over the year. The evidence suggest that families use credit card debt, but not savings, to finance consumption between EITC payments. We take this as evidence of the presence of the credit card debt puzzle, and estimate its costs for the EITC program.

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

JEL Classification: H2, I3, J18

Suggested Citation

Jones, Lauren Eden and Michelmore, Katherine, Timing Is Money: Does Lump-Sum Payment of Tax Credits Induce High-Cost Borrowing? (January 8, 2016). Available at SSRN: https://ssrn.com/abstract=2712849 or http://dx.doi.org/10.2139/ssrn.2712849

Lauren Jones

The Ohio State University ( email )

1787 Neil Avenue
Columbus, OH 43210
United States

Katherine Michelmore (Contact Author)

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

Syracuse University ( email )

900 S. Crouse Avenue
Syracuse, NY 13244-2130
United States

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