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Information, Tax Preparation Services and Participation in the Earned Income Tax Credit

Information, Tax Preparation Services and Participation in the Earned Income Tax Credit. Eduardo Fajnzylber HEC Montr é al. Objectives. Investigate the importance of information on the decision to participate in the Earned Income Tax Credit (EITC)

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Information, Tax Preparation Services and Participation in the Earned Income Tax Credit

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  1. Information, Tax Preparation Services and Participation in the EarnedIncome Tax Credit Eduardo Fajnzylber HEC Montréal

  2. Objectives • Investigate the importance of information on the decision to participate in the Earned Income Tax Credit (EITC) • Focus on a specific sources of information: the availability of tax preparations services in the neighborhood

  3. The Earned Income Tax Credit • Currently, the main cash transfer program in the US • Provides positive incentives to work for low income families with children • Application is performed through the income tax system • Disadvantaged population is often unfamiliar with filing tax forms

  4. Tax Preparation Services (TPS) • They provide two essential services: • Reduce the transaction cost of filling a form • In many cases, provide advance payment (loan) • With expansion of the EITC, they started operating in poor neighborhoods • Idea: the more TPS in your neighborhood, the more likely you are to participate • They also facilitate information diffusion in neighborhoods (interact w/peer effect)

  5. Econometric Model • EITC participation: Yin = a + b Xi + g TPSn + h Zn + ei • Problem: Endogenous location decision of TPS; they can locate in higher eligibility potential areas. • Solutions: Test for positive sorting into neighborhoods using 1990 Census data to construct time varying eligibility measures

  6. Results • Increasing TPS by one unit (the average number is 2.16) in an averagely sized zip code would increase the likelihood of participating in the EITC by 10 % points. • Our endogeneity analysis suggests negative selection (into areas with lower eligibility potential), thus our results are a lower bound on the effect of TPS

  7. Policy Implications • Information is costly to diffuse • Private sector can contribute to this diffusion if the margin is high enough:The EITC gives a large 1 time benefit, which justifies hiring a private service • Other programs could increase the per-time benefit by reducing frequency of payments.

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