Timing Is Money: Does Lump-Sum Payment of Tax Credits Induce High-Cost Borrowing?
Saturday, November 14, 2015 : 8:50 AM
Brickell South (Hyatt Regency Miami)
*Names in bold indicate Presenter
Since the advent of welfare reform in 1996, spending on tax credits targeted towards low-income families has far surpassed spending on traditional welfare. As of 2011, spending on welfare was around 30 billion dollars nationally, while the two largest tax credits for low-income families, the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC), were each worth over 50 billion dollars. The shift away from delivery of transfer income through the welfare system to delivery through the tax code means that, instead of receiving a consistent, monthly welfare check, many families receive a lump-sum payment when they file their taxes each year.While lump-sum delivery of benefits can be a helpful savings mechanism to allow families to purchase large items that would be otherwise unaffordable (Tach and Halpern-Meekin 2014), it may also induce families to take on costly debt throughout the year in anticipation of tax refunds come February. In this paper, we investigate the extent to which the once-a-year timing of benefit payments induces families to take on additional unsecured debt. Using the Survey of Income and Program Participation (SIPP) wealth topical modules from 1990 to 2008, we use a simulated instruments approach to estimate the impact of tax credit program expansions on household credit card debt. Preliminary evidence suggests increases in tax credit generosity are associated with increases in credit card and other unsecured debt.