Panel Paper:
High-Frequency Spending Responses to the Earned Income Tax Credit
*Names in bold indicate Presenter
Data and Methods: We estimate spending out of federal tax refunds to recipients of the EITC in the weeks around refund issuance. Central to our study of the two-week EITC delay are new daily, state-level indexes of spending. These indexes were constructed using aggregated and anonymized credit, debit, and electronic transactions from First Data, a large payment processing company. Spending is categorized by the type of merchant where the payment transaction occurred (for example, at a restaurant or a department store) and by the location of the merchant. We use plausibly exogenous variation in the timing of refund issuance to tax filers to quantify the high-frequency spending response to the EITC refund delay.
Findings: We find EITC recipients spend 15 cents out of each refund dollar at retail stores and restaurants within two weeks of issuance, with two thirds of the spending occurring in the week of receipt. We also document an effect on non-durable consumption, as spending at grocery stores and restaurants rises with receipt of the EITC refund. Given that these refunds are large, predictable payments, our results point to excess sensitivity among low-income working families in the U.S. and suggest that alternatives to the lump sum EITC refund payments might better support consumption throughout the year.
Significance: The two-week delay in 2017 of over $40 billion in refunds—while short lived— led to a noticeable change in the timing of spending in February, suggesting limited access to liquidity for low- to moderate-income households.
Full Paper:
- APPAM_hi_freq_spendout_EITC_2019.pdf (1088.4KB)