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
Date Written: January 8, 2016
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: Suggested Citation