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Responses to Tax Credits

Paper Session

Friday, Jan. 6, 2023 10:15 AM - 12:15 PM (CST)

New Orleans Marriott, Preservation Hall Studio 4
Hosted By: Society of Government Economists
  • Chair: Breno Braga, Urban Institute

The Early Effects of the Child Tax Credit Expansion on Consumer Expenditures

Sophie Collyer
,
Columbia University
Thesia Garner
,
U.S. Bureau of Labor Statistics
Neeraj Kaushal
,
Columbia University
Jiwan Lee
,
Columbia University
Jake Schild
,
U.S. Bureau of Labor Statistics

Abstract

The COVID-19 pandemic triggered not only a public health crisis but also an economic crisis, with wide swaths of the United States population losing jobs and income. The government response, however, was robust, providing historic levels of income support to the U.S. population. One component of this response was the expansion of the Child Tax Credit, a partially refundable tax credit aimed at helping parents offset the cost of raising children. The expansion, enacted through the American Rescue Plan Act of 2021, made three important changes to the policy. First, it increased its generosity, raising maximum benefit levels from $2,000 per child to $3,600 per young child and $3,000 per older child. Second, it made the credit “fully refundable” – extending the full benefit to all low-income children regardless of parental earnings. Third, it allowed the credit to be partially distributed as an advanced monthly payment beginning in July 2021. Though now expired, this expansion potentially affected parents’ ability to invest in their children through increased expenditures. This paper uses data from the Consumer Expenditure Survey (CE) to analyze whether the expanded CTC raised family expenditures, both overall and for specific expenditure categories such as children’s education and development. The paper applies a difference-in-difference framework, harnessing variation in the policy by presence, number, and age of children in the family, as well as prior income level – all of which determine the level at which families of different circumstances benefited from the policy change. We test the sensitivity of results using placebo tests in prior years, and discuss the policy implications.

Employment and Earnings Effects of California's Young Child Tax Credit

Matthew Unrath
,
U.S. Census Bureau

Abstract

In 2019, California introduced a new tax credit that provides a flat $1,000 benefit to tax filers with a child younger than age 6 and earnings between $1 and $25,000. In this paper, I identify the program’s causal effect on affected workers’ actual labor supply responses, comparing households whose children turn 6 near the end of the relevant tax year versus the beginning of the next tax year. I supplement this regression discontinuity design in two ways: first, by differencing out responses among workers in other states, and second, by differencing out responses among the same set of workers in prior years. I identify children and adults affected by this reform using matched birth records and federal tax data. Specifically, I use the Census Household Composition Key and Numident files to link children to their birth parents, birth state, and birth data. I use 1040s and W2s to identify whether children were claimed on a federal return and resided in California, and whether their parents had wage earnings.

My setting allows me to credibly identify responses to a unique and large labor supply distortion. How much workers respond to this tax credit will inform our understanding of labor supply elasticities, labor market frictions, the salience of tax policy for low-income households, and ongoing discussion about flat subsidies like the new CTC. My design offers advantages over common Difference-in-Difference papers investigating EITC reforms, which suffer from external validity and selection bias concerns. My approach also boasts advantages over other papers studying year-end discontinuities in eligibility for tax benefits and workers with children born close to Jan 1,

Effects of the Earned Income Tax Credit on Intergenerational Health Mobility

Katie M. Jajtner
,
University of Wisconsin-Madison
Yang Wang
,
University of Wisconsin-Madison

Abstract

Health disparities persist across generations in contrast to images of equal opportunity. Intergenerational health mobility quantifies the link between parent and child health and can be used to gauge health opportunity and equity. Although there is certainly a genetic component to this relationship, research demonstrates there is ample room for social, contextual, and environmental impacts. The Earned Income Tax Credit (EITC) is one of the largest anti-poverty programs in the US. Previous research shows that the EITC directly increases recipients’ income and labor supply, and indirectly improves their financial stability, access to health insurance, and environments. Recipients’ children also complete more education. These indirect effects further affect health for parents and children, albeit at different stages of the lifecycle. We hypothesize the EITC could decouple parents’ and children’s health by increasing parent health among lower socioeconomic individuals and/or decreasing the burden poor parent health exerts on the next generation.

Using over 10,000 parent-child pairs from the 1949-1994 birth cohorts in the Panel Study of Income Dynamics, we estimate the effect of EITC benefits on intergenerational health mobility. Since EITC benefit receipt is endogenous, we leverage extensive exogenous variation in EITC exposure during childhood in an intent-to-treat framework to identify causal effects of the policy on three intergenerational health mobility metrics: health persistence, upward health mobility, and downward health mobility. Additionally, we examine heterogeneous effects by race/ethnicity, sex, and the timing of policy exposure.

Preliminary results suggest each $1,000 of EITC benefits decreases health persistence by 0.0011, increases upward mobility by 0.159 percentiles, and decreases downward health mobility by 0.106 percentiles. With cumulative childhood exposures ranging from $0-$140,000, overall impacts are large. We also find evidence suggesting non-Hispanic Black Americans may gain more health mobility from EITC exposure relative to non-Hispanic White counterparts, partially offsetting observed health mobility gaps.

Returns to Homeownership and Inequality: Evidence from the First-Time Homebuyer Tax Credit

Marina Gindelsky
,
U.S. Bureau of Economic Analysis
Jeremy Moulton
,
University of North Carolina-Chapel Hill
Scott Wentland
,
U.S. Bureau of Economic Analysis
Kelly Wentland
,
George Mason University

Abstract

Homeownership is often promoted as a key to building wealth and a pathway to reducing wealth inequality across racial groups in the U.S. However, the prior two decades saw a housing bubble form and burst with significant impacts on homeownership rates and returns, which varied by race. In this paper, we examine 1) how returns to homeownership differ by race using address-level microdata over this period, and 2) whether a policy intended to expand homeownership among more liquidity constrained buyers, the 2008-10 First-time Homebuyer Tax Credit (FHTC), altered this broader dynamic. To answer these questions, we employ a unique national dataset linking internal American Community Survey (ACS) households to transactions from Zillow’s ZTRAX database for 2000-2016. We exploit the FHTC setting using a difference-in-differences framework, finding that income-eligible homebuyers had substantially higher gross returns to homeownership compared to ineligible households. In contrast to our initial findings, where minority householders realized lower returns to housing over the broader boom-bust-recovery period, the FHTC results also show eligible Black and Hispanic householders who purchased a home during the relevant policy period significantly outperformed White householders.

Discussant(s)
Claudia Sahm
,
Sahm Consulting
Sarah Miller
,
University of Michigan
Siha Lee
,
McMaster University
Erik Hembre
,
University of Illinois-Chicago
JEL Classifications
  • I3 - Welfare, Well-Being, and Poverty
  • D3 - Distribution