The Earned Income Tax Credit Increases the Financial Stability of Low-income Single Mothers
Financial well-being can help families weather economic shocks, invest in homes or education, or feel secure enough to search for better jobs.
by Lauren Jones and Katherine Michelmore | June 12, 2018
The earned income tax credit (EITC) began in 1975 as a small, temporary credit for low- to middle-income workers with children. Because of its success in reducing poverty and encouraging work, it has been expanded several times since, becoming more generous for families with multiple children and for workers in some states. Our new work, published in the Journal of Policy Analysis and Management, examines how expansions to the EITC over the last several decades affected household savings and unsecured debt among single mothers. Our results suggest that the EITC not only encourages work, but also allows families to save a portion of their earnings, increasing their longer-term financial well-being. Financial well-being can help families weather economic shocks, invest in homes or education, or feel secure enough to search for better jobs. The EITC may therefore have additional, long-term benefits beyond poverty reduction.
Key Findings:
Increases in tax credit generosity are associated with increases in the likelihood of holding savings in the formal banking sector.
Households are gaining access to savings and checking accounts and increasing the amount of money they save.
In some analyses, families appear to also pay down debt as a result of the many expansions to the EITC over the last two decades.
Considering that access to mainstream banking services can improve credit scores and decrease delinquency, the EITC may allow families to reduce the use of more expensive forms of credit, such as check cashing services and payday lending.
The EITC helps improve the social mobility of single mothers, allowing them to access formal savings markets, while also enabling them to pay down higher-cost forms of debt.
Implications for Policy:
A $1,000 increase in average household EITC benefits leads to a 3 percentage point increase in the likelihood of holding any money in a savings or checking account.
A $1,000 increase in average household EITC benefits leads to an increase of $700 in average savings balances.
Because the EITC encourages work, expansions to the EITC likely allow families to save some of the credit itself as well as some of their increased earnings.
The EITC helps single mothers pay down unsecured debt, particularly following expansions to the policy in the 1990s.
To learn more about ESSPRI visit esspri.uci.edu.
