Indicators of Saving Earned Income Tax Credit

Recipients in the Twin Cities of Minnesota

Leo T. GabrielAssociate Professor of Business

Bethel University

Presentation for the MN Saves Network  Sept. 13, 2007

Problem

Literature indicates that low-income workers, which includes Earned Income Tax Credit (EITC) recipients, do not have adequate savings to meet long-term needs as suggested by economic theory.

Research Questions

1. What factors contribute to saving in financial assets for EITC recipients in the Twin Cities of Minnesota?

2. Is there a positive association between tax refund amounts and intending to save tax refunds?

Results—Research Question 1

What factors contribute to saving in financial assets for EITC recipients in the Twin Cities of Minnesota? Income Banked Race Marriage

Results—Research Question 2

Is there a positive association between tax refund amounts and intending to save tax refunds?

There is no association between tax refund amounts and intending to save tax refunds.

Results There was a low percentage of savers in this

study. Factors that contribute to a low percentage of

savers: High percentage of families with income below

the poverty threshold (66%) High percentage of unbanked families (26%) High percentage of Black families (46%).

Conclusions Literature suggests that institutional theory

explains saving behavior in low-income families: Access to financial institutions Incentives Financial education Facilitation of savings

Literature: Earned Income Tax CreditHistory of EITC Growth of the EITC

(Ventry, 2000)

Consumption of EITC Refunds Durable goods (Barrow &

McGanahan, 2000) 70% consumed

immediately (Edwards, 2004)

Literature: Earned Income Tax Credit

Banked ShoreBank saving program

(Beverly et al., 2004)

Savings Economic & social

mobility (Smeeding et al., 2000)

Lump sum refund (Romich & Weisner, 2000)

Literature: Saving Theory (LCH)Life-Cycle Hypothesis

(Modigliani & Brumberg, 1954; Friedman, 1957)

Dominate theory in saving literature

Economic theory predicts that individuals will save for income over their life span.

Income, age, uncertainty, family composition, taxes, and rates of return are factors.

Literature: Saving Theory (Institutional)

Institutional Theory (Sherraden, 1991)(Beverly & Sherraden, 1999)

Suggests that institutions are factors in saving decisions.

Institutional factors Access Incentives Financial education Facilitation

Literature: Tax Policies Reduction of saving disincentives (1996)

Individual Development Accounts (1998)

Retirement savings credit (2001)

State-level EITCs (1998- )

Knowledge of Saving-Low IncomeDecision to save in financial assets

(Carney & Gale, 2001)

Determinants Income Age Education Marital status Employment status Public assistance Race Banked

Current TrendsBanking

Efforts to provide bank accounts for low income families.

Efforts encouraging direct deposit of tax refunds.

Research Methodology—Data Data set from AccountAbility Minnesota (AAM)

Data set includes 2004 tax return data and responses to survey questions A sample of over 700 participants Criteria for selection:

Completed survey questions Positive tax refund Electronically filed tax returns Tax returns accepted by IRS and MN Department of Revenue

Question 1: What factors contribute to saving decisions?

Dependent Variable (binary): Indicator of savings in financial assets (saver=1, nonsaver=0). Evidence of saving: interest income, dividend income, capital

gains/losses, IRA contributions, or retirement savings credit.

Independent Variables: Income (three income groups) Age (three age groups) Bank Account Race (Black, Hispanic, White, Other) Public Assistance (0-5) Marital Status (married or single) Family Size (0-8)

Question 1: What factors contribute to saving decisions?

Indicator of Saving in Financial Assets

Cases Percentage

Savers

Interest Income 77 10.3%

Dividend Income 20 2.7%

Capital Gain/Loss 13 1.7%

Individual Retirement Account 2 0.3%

Retirement Saving Credit 39 5.2%

Total Indicators 151

Question 1: What factors contribute to saving decisions?

Income Groups for Savings in Financial Assets

Income Group (as a % of poverty)

Savers (%)

Less 100% 9.9%

100-150% 24.8%

Over 150% 31.1%

Question 1: What factors contribute to saving decisions?

Age Groups for Savings in Financial Assets

Age Group

Savers (%)

Under 35 13.2%

35-50 18.9%

Over 50 15.9%

Question 1: What factors contribute to saving decisions?

Banked Participants for Savings in Financial Assets

Savers (%)

Banked 20.5%

Not Banked 3.6%

Question 1: What factors contribute to saving decisions?

Racial Groups for Savings in Financial Assets

Racial Group

Savers (%)

Black 12.0%

Hispanic 15.1%

Other 14.8%

White 21.9%

Question 1: What factors contribute to saving decisions?

Marital Status for Savings in Financial Assets

Savers (%)

Married 31.6%

Single 14.8%

Question 1: What factors contribute to saving decisions? Logistic Regression Results

Families with income between 100-150% of poverty were 2.3 times more likely to save than families with income below the poverty threshold.

Families with income greater than 150% of the poverty threshold were 3.8 times more likely to save than families with income below the poverty threshold.

Question 1: What factors contribute to saving decisions? Logistic Regression Results

Families with bank accounts were 4.5 times more likely to save than families without bank accounts.

When four outliers were removed from the data, families with bank accounts were 8 times more likely to save than families without bank accounts.

Question 1: What factors contribute to saving decisions? Significant Regression Results

Families who identified themselves as White were 2 times more likely to save than families that identified themselves as Black (African or African-American).

Question 2: Is there a positive association between tax refund amounts and intending to save tax refunds?

Variables

Dependent Variable (binary): Indicator of saving tax refund (saver=1, nonsaver=0) Evidence of saving: Participants indicating that the most

important thing that they will do with their tax refunds is save it.

Independent Variables: Combined federal and state income tax refund amount. Income, Age, Bank Account, Race, Public Assistance,

Marital Status, Family Size

Question 2: Is there a positive association between tax refund amounts and intending to save tax refunds?

Indicator of Saving Tax Refund

Percentage

Savers 7.0%

Nonsavers 93.0%

Question 2: Is there a positive association between tax refund amounts and intending to save tax refunds?

Tax Refund Amount

Savers

Refund Amount Nonsavers

Refund Amount Mean $2,495 $2,590 Std. Deviation $2,164 $2,156

Question 2: Is there a positive association between tax refund amounts and intending to save tax refunds?

Tax Refund Amount Frequency

Refund Amount Savers

(%) Total

(cases) Less $1000 6.96% 273 $1000-1999 9.62% 104 $2000-2999 5.26% 57 $3000-3999 2.97% 101 $4000-4999 6.02% 83 $5000-5999 14.29% 70 $6000-6999 2.94% 34 $7000-7999 5.00% 20 $8000-8999 0.00% 3 $9000 or more 0.00% 1

Conclusions Life-cycle hypothesis continues as the

dominate theory in saving literature. Institutional theory is becoming more

prominent, especially in low-income saving literature: Access to financial institutions Incentives Financial education Facilitating savings

Limitations This study does not establish a causal

relationship between saving and predictor variables.

Limitations Tax return data limits this study. Tax return data does not capture all factors

that contribute to saving decisions. Other factors

Education Work status Home ownership Credit history

Further Research Linking EITC refunds with saving incentive

programs, such as an IDA.

Evaluating programs offering bank accounts to EITC recipients.

Discussion and Questions