"Money Now or Later? The Advance Earned Income Tax Credit:Preliminary Results from a Field Experiment"
Arthur-Damon JonesGraduate Student Economics DepartmentUniversity of California Berkeley
Pipeline ConferenceDuke UniversityJuly 14-15, 2006
Motivation and Existing Literature
Experimental Design
Preliminary Results
Interpretation and Extensions
Motivation
Earned Income Tax Credit (EITC):
Up to 40% increase in income (max $4,300)
Largest federal cash transfer to low-income households
$4.7 billion spent in 1975, $34 billion in 2005
Advance Earned Income Tax Credit (AEITC):
Receive portion of the EITC early, with each pay check
Up to 60% of the EITC for one child (max $1,600)
Remainder of EITC is disbursed with tax refund
If ineligible ex post, must pay back payments
Motivation
Motivation
“Lump Sum”
“Advance” Ineligible
Eligible
Jan. Dec.Jun. Jan. – Apr.
Participation rates among eligible tax filers, TY 2003
80%
.5% - 2%0%
20%
40%
60%
80%
100%
EITC AEITC
Motivation
Estimated benefit of AEITC to recipients:
Assumptions
Eligible households: 17 millionMedian advance payment: $1,600Average EITC spell: 4 years
Potential Value of AEITC to Recipients
Invested $4.6 billion(4% return)
Used to pay off debt $20.4 billion(15% APR)
Motivation
Existing Literature
EITC Recipients Seem to Face Liquidity Constraints:
Berube and Kornblott (2005)- 38.3% of EITC recipients used Refund Anticipation Loans in 2002
Rhine et. al. (2005)- 25% of EITC recipients expected to use refund to pay off past debt
Smeeding et. al. (2000)- Top priority for EITC was paying bills (past or future)
Further evidence of “Fringe Financing”- Payday Loans, etc.
Existing Literature
Reasons for low AEITC participation:
Theories:
Currie (2004)- Transactions costs, Stigma, Information, Administrative barriers
Smeeding et. al. (2000)- Lack of awareness, Employer unwillingness
Evidence:
Romich and Weisner (2004), Olson and Davis (1994), GAO (1992, 1994)
- Preference for lump sum payment, Concerns about increased end-of-the-year liability, Lack of awareness
Existing Literature
IRS AEITC experiment, 1997:
Randomly notified a subset of eligible filers about the AEITC- 6 million taxpayers
Treatment group members were twice as likely to use the AEITC than control group members: 1.3% versus .5%
Results were statistically significant, but modest gains nonetheless
Preliminary Research
Center for Economic Progress (CEP) Study 2005:
Non-profit based in the Chicago Metropolitan Area offering free tax preparation
Surveyed a sample of eligible filers about their knowledge of and preferences over the advance option
Matched surveys with tax returns and demographic information
Preliminary Research
Center for Economic Progress (CEP) Study 2005:
Expectations and Use of the EITC
Did you expect to receive the EITC?Yes 72.5%No 23.3%Not Sure 4.2%N=120
Main use of refundPast Bills/Debt 44.5%Savings 19.5%Tuition 10.2%Future Bills 10.2%N=128
Source: Author's tabulation of CEP Sample
Preliminary Research
Center for Economic Progress (CEP) Study 2005:
Prior Knowledge of and Willingness to Try the AEITC
Were you aware of the AEITC?Yes 29.9%No 70.1%N =127
Yes 10.2%No 89.8%N=128
Source: Author's tabulation of CEP Sample
Now that you are aware of it, would you have preferred to receive the AEITC?
Preliminary Research
Center for Economic Progress (CEP) Study 2005:
Reasons for Not Trying the AEITC
Prefer the lump sum 58.2%Do not wish to owe money back 33.6%Too much hassle 8.2%N =110
Past Bills/Debt 54.0%Savings 19.1%Future Bills 9.5%N=63
Source: Author's tabulation of CEP Sample
Why do you prefer a lump sum?
Why would you not have preferred to receive the AEITC?
Existing Literature
Unanswered Questions:
Can we disentangle the potential explanations?
Why do recipients prefer the lump sum payment?
What role does the employer play in encouraging AEITC participation?
What are some previously unexplored effects of the AEITC?
What are the implications for the traditional models of rational choice?
Motivation and Existing Literature
Experimental Design
Preliminary Results
Interpretation and Extensions
Overview:
Collaboration with a large-scale employer
Vary information and ease of enrollment across employment sites
Offer employees the option to direct AEITC payments into a 401(k) plan
Rerun treatment among new hires
Exploit annual renewal period
Experimental Design
Company “A”:
Large-scale retail firm, nationwide
80,000 employees
High number of minimum wage earners
Run Experiment in Western and Southern regions
Experimental Design
Phase 1 – Treatment 1: “Advance EITC”
“Randomly” expose sites to information and easier enrollment
- Advance EITC video- Advance EITC brochure- W-5 form- “Active Decision”: Everyone hands in a “yes” or “no”
Experimental Design
Phase 1 – Treatment 2: “401(k)”
Interact Advance EITC with 401(k) plan
- Advance EITC video w/ 401(k) info- Advance EITC/401(k) brochure- W-5 form- 401(k) EZ enrollment forms- “Active Decision”: Everyone hands in a “yes” or “no”
Experimental Design
Phase 1 and 2 Design:
Company A
Regions(2)
Districts(20)
Employees(10,000)
Stores(224)
Experimental Design
Phase 1 and 2 Design:
Company A
Regions(2)
Districts(20)
Employees(10,000)
Stores(224)
Data at the EmployeeLevel
Experimental Design
Phase 1 and 2 Design:
Company A
Regions(2)
Districts(20)
Employees(10,000)
Stores(218)
Randomization atthe District level!
Experimental Design
Competing Hypotheses:
Traditional
- transactions costs- stigma- inter-household tradeoffs
Behavioral
- procrastination- loss aversion- mental accounting- sophisticated present-bias/commitment device
Experimental Design
Treatment Addresses:
Traditional
- transactions costs- stigma- inter-household tradeoffs
Behavioral
- procrastination- loss aversion- mental accounting- sophisticated present-bias/commitment device
Experimental Design
Motivation and Existing Literature
Experimental Design
Preliminary Results
Interpretation and Extensions
Preliminary Results
Treatment and Control Groups are “Balanced”
Control AverageAdvance EITC
Difference401(k)
Difference
Advance EITC Participation 0.0018 0.0018 -0.0002 (0.0009) (0.0016) (0.0012)401(k) Participation 0.4320 0.0151 0.0354 (0.0157) (0.0225) (0.0215)401(k) Contribution Rate 0.0594 0.0016 0.0015 (0.0026) (0.0040) (0.0039)401(k) Eligibility 0.4451 -0.0161 0.0186 (0.0105) (0.0149) (0.0145)Tenure 2.6219 0.1053 0.1195 (0.0764) (0.1157) (0.1067)Wage 8.5081 -0.3013 -0.0293 (0.0547) (0.0792) (0.0735)Hours/wk 26.3934 0.0606 0.1507 (0.1653) (0.2289) (0.2227)Federal Exemptions 1.2913 0.3848 0.1493 (0.1206) (0.2280) (0.2031)Age 34.3676 -0.6982 0.4142 (0.3234) (0.4564) (0.4426)
Number of Observations 2382 2387 2715
Preliminary Results
Control AverageAdvance EITC
Difference401(k)
Difference
Black 0.1963 0.0013 0.0625 (0.0084) (0.0119) (0.0122)Hispanic 0.3052 0.0222 -0.0250 (0.0098) (0.0139) (0.0132)Asian 0.0825 -0.0191 0.0112 (0.0058) (0.0078) (0.0083)Married 0.3120 -0.0069 -0.0154 (0.0098) (0.0138) (0.0134)Male 0.1954 0.0301 -0.0049 (0.0084) (0.0122) (0.0115)Souther Region 0.4088 0.2615 0.2534 (0.0104) (0.0144) (0.0140)Store Size 45.3716 3.6783 3.2612 (0.2921) (0.4307) (0.3974)Turnover 0.0025 0.0008 0.0012 (0.0010) (0.0016) (0.0016)
Number of Observations 2382 2387 2715
Treatment and Control Groups are “Balanced”
Preliminary Results
Graphical AnalysisAdvance EITC Participation Rate
0.0%
0.3%
0.5%
0.8%
1.0%
1.3%
1.5%
1/23/2006 2/12/2006 3/4/2006 3/24/2006 4/13/2006 5/3/2006 5/23/2006 6/12/2006 7/2/2006
Advance EITC 401(k) Control
Preliminary Results
Graphical Analysis Advance EITC Participation Rate, Southern Region
0.0%
0.3%
0.5%
0.8%
1.0%
1.3%
1.5%
1/23/2006 2/12/2006 3/4/2006 3/24/2006 4/13/2006 5/3/2006 5/23/2006 6/12/2006 7/2/2006
Advance EITC 401(k) Control
Preliminary Results
Graphical Analysis Advance EITC Participation Rate, Western Region
0.0%
0.3%
0.5%
0.8%
1.0%
1.3%
1.5%
1/23/2006 2/12/2006 3/4/2006 3/24/2006 4/13/2006 5/3/2006 5/23/2006 6/12/2006 7/2/2006
Advance EITC 401(k) Control
Preliminary Results
Graphical Analysis401(k) Participation Rate
35.0%
37.5%
40.0%
42.5%
45.0%
47.5%
50.0%
52.5%
55.0%
1/23/2006 2/12/2006 3/4/2006 3/24/2006 4/13/2006 5/3/2006 5/23/2006 6/12/2006 7/2/2006
Advance EITC 401(k) Control
Preliminary Results
Graphical Analysis
35.0%
37.5%
40.0%
42.5%
45.0%
47.5%
50.0%
1/23/2006 2/12/2006 3/4/2006 3/24/2006 4/13/2006 5/3/2006 5/23/2006 6/12/2006 7/2/2006
Advance EITC 401(k) Control
401(k) Participation Rate, Southern Region
Preliminary Results
Graphical Analysis401(k) Participation Rate, Western Region
35.0%
40.0%
45.0%
50.0%
55.0%
60.0%
1/23/2006 2/12/2006 3/4/2006 3/24/2006 4/13/2006 5/3/2006 5/23/2006 6/12/2006 7/2/2006
Advance EITC 401(k) Control
Preliminary Results
Regression Analysis: Advance EITC Participation
Advance 0.0072 0.0088 0.0072 0.0085 0.0054 0.0054EITC (0.0021)*** (0.0025)*** (0.0021)*** (0.0023)*** (0.0026)** (0.0026)**
[0.0025]*** [0.0033]** [0.0025]** [0.0029]*** [0.0018]*** [0.0000]***
Adj. R 2 0.0022 0.0017 0.0389 0.0639 0.0018 0.0025N 4,458 4,458 4,458 4,139 8,915 8,915
401(k) 0.0071 0.0074 0.0071 0.0062 0.0073 0.0074(0.0020)*** (0.0020)*** (0.0020)*** (0.0019)*** (0.0023)*** (0.0023)***[0.0031]** [0.0030]** [0.0031]** [0.0025]*** [0.0028]** [0.0000]***
Adj. R 2 0.0021 0.0038 0.0365 0.0890 0.0025 0.0035N 4,800 4,800 4,800 4,381 9,550 9,550
Controls N Y N Y N Y
Difference-in-DifferenceProbitOLS
Preliminary Results
Regression Analysis: Advance EITC Participation
Advance 0.0021 0.0028 0.0063 0.0077 0.0038 0.0038EITC (0.0008)*** (0.0008)*** (0.0007)*** (0.0008)*** (0.0007)*** (0.0006)***
[0.0017] [0.0016]* [0.0024]** [0.0028]*** [0.0016]** [0.0015]**
Adj. R 2 0.0003 0.0020 0.0017 0.0034 0.0015 0.0013N 17,816 17,816 49,083 49,083 49,083 49,083
401(k) -0.0002 0.0003 0.0067 0.0077 0.0080 0.0087(0.0006) (0.0006) (0.0007)*** (0.0007)*** (0.0008)*** (0.0008)***[0.0013] [0.0012] [0.0028]** [0.0027]*** [0.0018]*** [0.0020]***
Adj. R 2 -0.0001 0.0009 0.0024 0.0047 0.0063 0.0071N 18,946 18,946 52,532 52,532 52,532 52,532
Controls N Y N Y N Y
Panel DataPre-Treatment Pre-/Post Treatment Fixed Effects
Preliminary Results
Regression Analysis: 401(k) Participation
Advance 0.0092 0.0188 0.0092 0.0252 -0.0009 -0.0007EITC (0.0218) (0.0201) (0.0218) (0.0258) (0.0305) (0.0264)
[0.0342] [0.0378] [0.0342] [0.0491] [0.0064] [0.0000]**
Adj. R 2 -0.0004 0.2426 0.0001 0.2178 -0.0005 0.2496N 2,027 2,027 2,027 2,027 4,144 4,144
401(k) 0.0730 0.1067 0.0730 0.1313 0.0403 0.0460(0.0209)*** (0.0194)*** (0.0209)*** (0.0246)*** (0.0292) (0.0255)*[0.0367]** [0.0375]*** [0.0367]** [0.0481]*** [0.0147]*** [0.0000]***
Adj. R 2 0.0049 0.2292 0.0039 0.2039 0.0036 0.2421N 2,250 2,250 2,250 2,250 4,584 4,584
Controls N Y N Y N Y
Difference-in-DifferenceProbitOLS
Preliminary Results
Regression Analysis: 401(k) Participation
Advance 0.0135 0.0241 0.0092 0.0169 -0.0027 -0.0026EITC (0.0082) (0.0075)*** (0.0089) (0.0079)** (0.0011)** (0.0011)**
[0.0336] [0.0362] [0.0339] [0.0348] [0.0032] [0.0032]
Adj. R 2 0.0008 0.2407 0.0001 0.2423 0.0065 0.0062N 14,274 14,274 26,276 26,276 26,276 26,276
401(k) 0.0352 0.0657 0.0772 0.1064 0.0386 0.0417(0.0079)*** (0.0072)*** (0.0085)*** (0.0077)*** (0.0021)*** (0.0022)***
[0.0369] [0.0375]* [0.0358]** [0.0352]*** [0.0064]*** [0.0068]***
Adj. R 2
N 0 0 0 0 0 015784 15784 29048 29048 29048 29048
Controls N Y N Y N Y
Panel DataPre-Treatment Pre-/Post Treatment Fixed Effects
Preliminary Results
SummaryAdvance EITC Treatment:
-Relatively “robust,” one-time increase in Advance EITC enrollment
-Statistically significant, though small in magnitude (0.4-0.8 percentage
points)
-Proportionate change comparable to previous literature (Four-fold
increase in participation)
-Ultimate magnitude is ambiguous due to missing information on
eligibility
-Actual effects may be as much as 16X larger
Preliminary Results
Summary401(k) Treatment:
-Effects less “robust” but larger is size than the Advance EITC
-Statistically significant, moderate effects (4 percentage point increase
or between 7-13 percentage points depending on method of analysis)
-Effect much smaller than default effects (30-80 percentage points)
-Longer time is needed to analyze effects, as they may still be taking
place beyond treatment period
-Effect does not appear to be channeled through Advance EITC
Motivation and Existing Literature
Experimental Design
Preliminary Results
Interpretation and Extensions
Interpretation and Extensions
Explaining Low Take-Up
-Eligibility for this program was much lower than expected
-Anecdotal evidence suggests that a preference for “Lump Sum” payment is a major reason for non-participation
-Concern about having to repay was also cited (Refund Anticipation
Loans eliminate uncertainty at a cost)
-Procrastination and stigma do not appear to be key factors
-Potential behavioral explanations include loss aversion and/or a desire
for forced savings
Phase 2: Opportunity to Adjust Design
Same as Phase 1 – Advance EITC Treatment 1, among new hires
- Advance EITC video- Advance EITC brochure- W-5 form- “Active Decision”- Eligibility survey- Forms included with other legally required documents (e.g. W-4 form)
Interpretation and Extensions
Interpretation and Extensions
Explaining Low Take-Up
-Eligibility for this program was much lower than expected
-Anecdotal evidence suggests that a preference for “Lump Sum” payment is a major reason for non-participation
-Concern about having to repay was also cited: Refund Anticipation
Loans eliminate uncertainty at a cost
-Procrastination and stigma do not appear to be key factors
-Potential behavioral explanations include loss aversion and/or a desire
for a commitment device due to hyperbolic discounting
Interpretation and Extensions
Explaining Low Take-Up
-Potential Revealed Preference approach
-Track actual tax season outcomes, including EITC eligibility and Refund Anticipation Loan usage
-Match outcomes with Advance EITC choices
Interpretation and Extensions
Effects of Advance EITC and 401(k)
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
0.8%
0.9%
1.0%
2/12/2006 3/4/2006 3/24/2006 4/13/2006 5/3/2006 5/23/2006 6/12/2006 7/2/2006
Advance EITC 401(k) Control
Weekly Turnover Rates
Phase 2: Opportunity to Adjust Design
Same as Phase 1 – Advance EITC Treatment 1, among new hires
- Advance EITC video- Advance EITC brochure- W-5 form- “Active Decision”- Eligibility survey- Forms included with other legally required documents (e.g. W-4 form)
Interpretation and Extensions
"Money Now or Later? The Advance Earned Income Tax Credit:Preliminary Results from a Field Experiment"
Arthur-Damon JonesGraduate Student Economics DepartmentUniversity of California Berkeley
Pipeline ConferenceDuke UniversityJuly 14-15, 2006