Examining the Implications of Recent Tax Reforms on Household Financial Outcomes
(Poverty and Income Policy)
*Names in bold indicate Presenter
Policymakers regularly use federal tax credits, such as the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC), to provide additional liquidity to economically disadvantaged households at the time of tax-filing. Substantial evidence demonstrates that the receipt of federal tax credits is associated with positive household outcomes, such as poverty reduction and improved health outcomes of parents and children (Tax Policy Center, 2015; Lim, 2009; Hoynes, Miller, & Simon, 2015). To that end, any changes in the delivery and the size of federal tax credits may have far-reaching consequences for financial well-being of their beneficiaries. The purpose of this panel is to investigate the implications of most recent modifications in tax laws on household financial outcomes. More specifically, the three papers included in this panel provide evidence around the two specific tax reforms—the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act, which may delay the receipt of federal tax refunds for certain groups of tax filers) and the Tax Cuts and Jobs Act of 2017 (the TCJA, which made changes to itemized deductions, and increased the standard deduction and the CTC).
The first paper investigates how low- and moderate-income households were able to smooth their spending during a two-week delay in refund issuance as a result of the PATH Act. The results indicate that even a brief waiting period to receive tax refunds could change households’ spending patterns, potentially leading to adverse household outcomes. Relatedly, the second paper examines how delays in the delivery of federal tax refunds caused by the PATH Act influenced households’ accumulation of debt and their experience of material hardship. Combining administrative and survey data, preliminary findings suggest that tax filers who were affected by changes in the tax law increased the amount of held credit card debt, student loans, loans from friends/family, and outstanding bills, relative to those who were not affected by policy changes. The third paper explores how the enactment of the TCJA reform—and particularly the expansion of CTC benefits to eligible households—affected taxation of families with children. Using the microsimulation model, the paper finds that while the amount of tax liabilities have decreased following the changes in tax policy, additional benefits received as a result of increased CTCs were lower than expected.
As tax laws continue to evolve over time, rigorous research on recent tax reforms is essential to inform policy makers and practitioners about the downstream implications these reforms have for the financial well-being and financial security of U.S. households.