"Money Now or Later? The Advance Earned Income Tax Credit:

"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



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



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


Now that you are aware of it, would you have preferred to receive the AEITC?



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


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?


Experimental Design

Preliminary Results


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


Company A

Regions(2)

Districts(20)

Employees(10,000)

Stores(224)

Data at the EmployeeLevel

Experimental 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


Experimental Design

Preliminary Results


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


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


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


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


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


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


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


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


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


Experimental Design

Preliminary Results



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)




-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



-Potential Revealed Preference approach

-Track actual tax season outcomes, including EITC eligibility and Refund Anticipation Loan usage

-Match outcomes with Advance EITC choices


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


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)


"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

"Money Now or Later? The Advance Earned Income Tax Credit:

Documents

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