The Earned Income Tax Credit: Program Outcomes, Payment Timing, and Next Steps for Research

Research Report

The Earned Income Tax Credit: Program Outcomes, Payment Timing, and Next Steps for Research

Abstract

Introduction

The Earned Income Tax Credit (EITC) provides substantial support for working families with low and moderate incomes, including those who may participate in traditional safety net programs, such as TANF. Based on incomes in 2019, the Tax Policy Center estimates that more than 27 million households qualified for almost $67 billion in reduced taxes and payments. The Center on Budget and Policy Priorities estimates that annually, the EITC lifts 5 to 6 million people out of poverty and reduces the depth of poverty for many more. The structure and timing of EITC payments is an important feature of the credit, and they potentially mediate its benefits and effects for recipients. In particular, the annual, lump-sum nature of the credit payment creates potential challenges for recipients and has been the subject of attention from researchers and policymakers.  

This brief reviews the design of the EITC and summarizes evidence on the relationship between the EITC and work, wages, poverty, financial stability, and other nonfinancial benefits for credit recipients. The authors conclude that research shows the EITC provides substantial support for working families with low and moderate incomes.

This brief also considers how the EITC’s effects may be sensitive to how the credit is paid. Several EITC proposals reflect a view that paying the credit periodically may be appropriate, and recent evidence from a small number of experiments also suggests that recipients of periodic payments found them useful. The brief concludes by identifying promising directions for future research.

Research Questions

  1. What are the financial and nonfinancial effects of the EITC on recipient outcomes, and how do those effects relate to the EITC’s design and payment structure?
  2. What are the potential implications of changing how the EITC is paid for its administration and its recipients?
  3. What are the research gaps in these areas and options for future research and evaluation to address these gaps?

Purpose

This brief reviews the design and administration of the EITC and summarizes the literature on the EITC’s effects on work, wages, poverty, financial stability, and other nonfinancial benefits, giving special attention to the way program outcomes might depend on or relate to payment timing. The authors discuss how changing the EITC’s payment structures may affect recipients and how the Internal Revenue Service (IRS) carries out the EITC to highlight important considerations and possible trade-offs. The brief identifies areas where additional research is needed to better understand these relationships and trade-offs related to payment timing.

Key Findings and Highlights

  • The EITC provides substantial benefits that extend to many people who are both working and participating in traditional safety net programs, such as TANF. This includes both near-term benefits, such as encouraging people to work and reducing poverty, and longer-term benefits related to improvements in health and educational attainment for children who live in households that receive the EITC.
  • The form and timing of EITC payments creates potential challenges for recipients. If people prefer to use the EITC mainly to purchase large items or as a form of forced savings, a lump-sum payment may be the most appropriate delivery mechanism. However, to the extent that people prefer to use their EITC to pay down debt or meet basic needs, a more regular payment might be appropriate. Limited studies of refund use show that people do both.
  • Changes to the timing of EITC payments might have implications for carrying out the credit in general and create particular challenges in the transition from a lump sum to periodic payment. The government’s administrative costs of periodic payment are likely to be somewhat higher than for lump-sum payments.
  • Some impacts of the credit on outcomes such as work and earnings, poverty, financial stability, and some nonfinancial outcomes might be sensitive to the payment timing. Early findings from a few small-scale demonstration projects that tried to test a different form of credit payment suggest that recipients of periodic payments found them useful.

Methods

This brief reviews the literature on several aspects of the EITC’s design and credit administration, such as payment timing, size of payments, and credit participation. The brief also summarizes evidence on the relationship between the EITC and work, wages, poverty, financial stability, and other nonfinancial benefits for credit recipients. In summarizing the empirical literature, the brief focuses on journal articles and articles from think tank websites that were published in the past 5 years. The evidence cited includes a small number of demonstration projects, quasi-experimental research, and econometric analyses.

The brief then discusses how the EITC’s effects may be sensitive to how the credit is paid, drawing on a range of published and unpublished literature and reports, including proposals for changing how the EITC is paid and evidence from a small number of recent experiments. The brief analyzes these sources in combination with the literature on the relationship between the EITC and recipients’ financial and nonfinancial outcomes to discuss considerations in changing the EITC’s payment structure and possible trade-offs.

Recommendations

Several promising paths exist for further research:

  • Additional research on how the EITC and other income support programs interact for both family well-being and work incentives would inform policymakers and program administrators on how families with low incomes tend to think about potential trade-offs.
  • Additional research on the opportunities and challenges created by interactions between the EITC and other safety net programs related to program administration and participation would also be valuable for understanding why some people are less likely to claim and receive the EITC than others. Researchers could study whether there are opportunities to encourage and increase participation in the EITC through administering traditional transfer programs.
  • Research to better understand how the timing of EITC payments affects program impacts is of particular interest and importance. Currently, early findings from a few small-scale demonstration projects that tried to understand how periodic payments might alter the EITC’s benefits suggest that recipients of periodic payments found them useful.
  • Additional research could more precisely and rigorously analyze what groups of people are most likely to benefit from the proposed alternative payment options and how they do so. Randomized controlled trials would be most useful for testing the effects on credit recipients’ financial and nonfinancial outcomes.   
  • Research to study more closely how the EITC’s size affects how people perceive and respond to the credit could build on prior work to better understand the benefits and drawbacks of monthly and quarterly payments. Analysts could also combine work on taxes and more traditional spending programs to understand how important an annual payment is in achieving longer-term goals and better understand whether some share of the EITC should continue to be paid as a lump-sum benefit, even if periodic payments are introduced.

Cross-Center Initiative

Cross-Center Initiative: 
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