Do single mothers in the United States use the Earned Income Tax Credit to reduce unsecured debt?

Abstract

The Earned Income Tax Credit (EITC) is a refundable credit for low-income workers that is mainly targeted at families with children. This study uses the Survey of Income and Program Participation's (SIPP) topical modules on Assets & Liabilities to examine the effects of EITC expansions during the early 1990s on the unsecured debt of the households of single mothers. We use two difference-in-differences comparisons over the study period 1988 to 1999, first comparing single mothers to single childless women, and then comparing single mothers with two or more children to single mothers with exactly one child. In both cases we find that the EITC expansions are associated with a relative decline in the unsecured debt of affected households of single mothers. This suggests that single mothers may have used part of their EITC to limit the growth of their unsecured debt during this period.

The Impact of the Earned Income Tax Credit on Household Finances

“…Our results suggest that in addition to providing families a lump sum benefit at tax time, the EITC also increases savings through its effect on labor supply. We also confirm results from Shaefer, Song, and Shanks () that the EITC helps single mothers pay down unsecured debt, particularly following the expansions in the 1990s. However, we find no statistically significant savings or debt responses following policy changes since 2000.…”

“…We find similar results when we restrict our analysis to 1990 to 1999, the same time period utilized by Shaefer, Song, and Shanks (). Further, when we employ the same identification strategy as Shaefer, Song, and Shanks (), we also find declines in unsecured debt for single mothers with two or more children, relative to single mothers with only one child (see Appendix Table for more details)…”

“…Our identification strategy, by contrast, compares outcomes among similarly sized households before and after several federal policy changes, as well as the introduction and subsequent expansion of 25 state EITCs. The results presented here are consistent with Shaefer, Song, and Shanks (), particularly when we implement the same identification strategy of comparing single mothers with two or more children to single mothers with only one child before and after a federal expansion for households with at least two children.…”

Debt Tolerance, Gender, and the Great Recession

“…Women invest in less-risky assets (see Garrison and Gutter 2010;Jianakoplos and Bernasek 2007;Nelson 2015;Prince 1993), and risk aversion is inversely related to the use of debt (Brown, Garino, and Taylor 2013). Additionally, women feel more burdened by debt, at least after it is incurred (Dunn and Mirzaie 2016;Keese 2012), and women use part of newly acquired welfare payments to pay down debt while men do not (Lyons and Fisher 2006;Shaefer, Song, and Shanks 2013). While most of the studies of the formation of attitudes toward debt in young adults include gender as a control, this is the first to study gendered patterns of debt tolerance in detail.…”

Effects of a Tax‐Time Savings Intervention on Use of Alternative Financial Services among Lower‐Income Households

“…Saving using tax refunds is more likely than saving using regular income (Mammen and Lawrence ; Romich and Weisner ; Shefrin and Thaler ), yet there are many competing demands on refunds among LMI households. Refunds are used to pay overdue bills, pay down credit card balances, and purchase items like clothes and furniture that are difficult to purchase with ordinary income (Halpern‐Meekin et al ; Mendenhall et al ; Shaefer et al ; Sykes et al ).…”