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

1. "Money Now or Later? The Advance Earned Income Tax Credit: Preliminary Results from a Field Experiment" Pipeline Conference Duke University July 14-15, 2006 Arthur-Damon Jones Graduate Student Economics Department University of California Berkeley

2. Motivation and Existing Literature Experimental Design Preliminary Results Interpretation and Extensions

3. 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

4. Motivation 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

5. Motivation “Lump Sum” Jan. Jun. Dec. Jan. – Apr. Eligible “Advance” Ineligible

6. Motivation Participation rates among eligible tax filers, TY 2003

7. Motivation Estimated benefit of AEITC to recipients: Assumptions Eligible households: 17 million Median advance payment: $1,600 Average 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)

8. 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.

9. 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

10. 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

11. 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

12. Preliminary Research Center for Economic Progress (CEP) Study 2005:

13. Preliminary Research Center for Economic Progress (CEP) Study 2005:

14. Preliminary Research Center for Economic Progress (CEP) Study 2005:

15. 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?

16. Motivation and Existing Literature Experimental Design Preliminary Results Interpretation and Extensions

17. Experimental Design 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

18. 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

19. 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”

21. 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”

23. Experimental Design Phase 1 and 2 Design: Company A Regions (2) Districts (20) Stores (224) Employees (10,000)

24. Experimental Design Phase 1 and 2 Design: Company A Regions (2) Districts (20) Stores (224) Employees (10,000) Data at the Employee Level

25. Experimental Design Phase 1 and 2 Design: Company A Regions (2) Districts (20) Randomization at the District level! Stores (218) Employees (10,000)

26. Experimental Design Competing Hypotheses: Traditional - transactions costs - stigma - inter-household tradeoffs Behavioral - procrastination - loss aversion - mental accounting - sophisticated present-bias/commitment device

27. Experimental Design Treatment Addresses: Traditional - transactions costs - stigma - inter-household tradeoffs Behavioral - procrastination - loss aversion - mental accounting - sophisticated present-bias/commitment device

28. Motivation and Existing Literature Experimental Design Preliminary Results Interpretation and Extensions

29. Preliminary Results Treatment and Control Groups are “Balanced”

30. Preliminary Results Treatment and Control Groups are “Balanced”

31. Preliminary Results Graphical Analysis Advance EITC Participation Rate

32. Preliminary Results Graphical Analysis Advance EITC Participation Rate, Southern Region

33. Preliminary Results Graphical Analysis Advance EITC Participation Rate, Western Region

34. Preliminary Results Graphical Analysis 401(k) Participation Rate

35. Preliminary Results Graphical Analysis 401(k) Participation Rate, Southern Region

36. Preliminary Results Graphical Analysis 401(k) Participation Rate, Western Region

37. Preliminary Results Regression Analysis: Advance EITC Participation

38. Preliminary Results Regression Analysis: Advance EITC Participation

39. Preliminary Results Regression Analysis: 401(k) Participation

40. Preliminary Results Regression Analysis: 401(k) Participation

41. Preliminary Results Summary • Advance 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

42. Preliminary Results Summary • 401(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

43. Motivation and Existing Literature Experimental Design Preliminary Results Interpretation and Extensions

44. 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

45. Interpretation and Extensions 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)

46. 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

47. 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

48. Interpretation and Extensions Effects of Advance EITC and 401(k) Weekly Turnover Rates

49. Interpretation and Extensions 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)

50. "Money Now or Later? The Advance Earned Income Tax Credit: Preliminary Results from a Field Experiment" Pipeline Conference Duke University July 14-15, 2006 Arthur-Damon Jones Graduate Student Economics Department University of California Berkeley