Where does it go? Spending by the financially constrained.

In this paper, we analyze the spending decisions of over 1.5 million Americans who vary in their degree of revealed credit constraints. Specifically, we analyze how these Americans spend their income tax refunds, using transaction-level data from a stored-value card product. Card-holders may choose among several tax settlement and loan options, effectively receiving cash as much as 90 days earlier than would have been possible without a settlement product. Those selecting earlier settlement options pay higher fees and interest, therefore revealing the level of credit constraints or impatience. We find that more credit constrained or impatient individuals spend their monies more quickly. The mix of cash and merchant transactions is similar between more and less constrained groups. Finally, the primary merchant uses of refunds are to pay for necessities (grocery stores, gas stations, etc.), and the fraction of the refund spending devoted to these necessities is higher for those with greater revealed credit constraints.

[1]  Garry Barker,et al.  Don't Leave Home Without It , 2014 .

[2]  Jonathan D. Fisher,et al.  Do liquidity constraints generate excess sensitivity in consumption? New evidence from a sample of post-bankruptcy households , 2007 .

[3]  Melvin Stephens.  Paycheque Receipt and the Timing of Consumption , 2006 .

[4]  R. Caputo.  The Earned Income Tax Credit: A Study of Eligible Participants vs. Non-participants , 2006, The Journal of Sociology & Social Welfare.

[5]  Sondra G. Beverly,et al.  Splitting Tax Refunds and Building Savings: An Empirical Test , 2006, Tax Policy and the Economy.

[6]  Cristian Pop-Eleches,et al.  Electronic Filing, Tax Preparers, and Participation in the Earned Income Tax Credit , 2005, Journal of Public Economics.

[7]  Joseph P. Lupton,et al.  The Household Spending Response to the 2003 Tax Cut: Evidence from Survey Data , 2005 .

[8]  P. Tufano,et al.  H&R Block and "Everyday Financial Services" , 2004 .

[9]  Reagan A. Baughman,et al.  Did Expanding the EITC Promote Motherhood , 2003 .

[10]  Melvin Stephens.  &Apos;3rd of Tha Month&Apos;: Do Social Security Recipients Smooth Consumption between Checks? , 2002 .

[11]  Nicholas S. Souleles.  Consumer response to the Reagan tax cuts , 2002 .

[12]  S. Houser,et al.  EITC and Marriage , 2002, National Tax Journal.

[13]  Amar Cheema,et al.  The Effect of Credit on Spending Decisions: The Role of the Credit Limit and Credibility , 2002 .

[14]  James R. White.  Earned Income Tax Credit Eligibility and Participation , 2001 .

[15]  T. Weisner,et al.  How Families View and Use the EITC: Advance Payment versus Lump Sum Delivery , 2000, National Tax Journal.

[16]  L. McGranahan,et al.  The Effects of the Earned Income Credit on the Seasonality of Household Expenditures , 2000, National Tax Journal.

[17]  D. Ellwood.  The Impact of the Earned Income Tax Credit and Social Policy Reforms on Work, Marriage, and Living Arrangements , 2000, National Tax Journal.

[18]  T. Smeeding,et al.  The EITC: Expectation, Knowledge, Use, and Economic and Social Mobility , 2000, National Tax Journal.

[19]  David B. Gross,et al.  Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data , 2000 .

[20]  Nicholas S. Souleles.  The Response of Household Consumption to Income Tax Refunds , 1999 .

[21]  Charles H. Mullin,et al.  EITC Eligibility, Participation, and Compliance Rates for AFDC Households: Evidence from the California Caseload , 1999 .

[22]  Tullio Jappelli,et al.  Testing for Liquidity Constraints in Euler Equations with Complementary Data Sources , 1998, Review of Economics and Statistics.

[23]  Jeffrey B. Liebman,et al.  Labor Supply Response to the Earned Income Tax Credit , 1995 .

[24]  Edgar K. Browning.  EFFECTS OF THE EARNED INCOME TAX CREDIT ON INCOME AND WELFARE , 1995, National Tax Journal.

[25]  H. Morparia.  Don't leave home without it. , 1991, Canadian Association of Radiologists journal = Journal l'Association canadienne des radiologistes.

[26]  David E. Runkle,et al.  Liquidity constraints and the permanent-income hypothesis: Evidence from panel data , 1991 .

[27]  S. Zeldes.  Consumption and Liquidity Constraints: An Empirical Investigation , 1989, Journal of Political Economy.

[28]  R. Feinberg.  Credit Cards as Spending Facilitating Stimuli A Conditioning Interpretation , 1986 .

[29]  Richard H. Thaler,et al.  Mental Accounting and Consumer Choice , 1985, Mark. Sci..

[30]  Fumio Hayashi,et al.  The Effect of Liquidity Constraints on Consumption: A Cross-Sectional Analysis , 1982 .

[31]  R. Thaler.  Toward a positive theory of consumer choice , 1980 .

[32]  E. Hirschman.  Differences in Consumer Purchase Behavior by Credit Card Payment System , 1979 .

[33]  P. Tufano,et al.  H&R Block's Refund Anticipation Loan: Perilous Profits at the Bottom of the Pyramid , 2007 .

[34]  J. Tobacman,et al.  Measuring the individual-level effects of access to credit: evidence from payday loans , 2007 .

[35]  Melvin Stephens.  American Economic Association " 3 rd of tha Month " : Do Social Security Recipients Smooth Consumption between Checks ? , 2007 .

[36]  Sumit Agarwal,et al.  The Rodney L. White Center for Financial Research The Reaction of Consumer Spending and Debt to Tax Rebates – Evidence from Consumer Credit Data , 2007 .

[37]  Sumit Agarwal,et al.  The Reaction of Consumer Spending and Debt to Tax Rebates - Evidence from Consumer Credit Data , 2007 .

[38]  Michael S. Barr,et al.  Tax Filing Experiences and Withholding Preferences of Low- and Moderate-Income Households Preliminary Evidence from a New Survey , 2006 .

[39]  Sabrina Su,et al.  Householder response to the earned income tax credit: path of sustenance or road to asset building , 2005 .

[40]  Sondra G. Beverly,et al.  Linking Tax Refunds and Low-Cost Bank Accounts , 2000 .

[41]  J. Scholz,et al.  THE EARNED INCOME TAX CREDIT: PARTICIPATION, COMPLIANCE, AND ANTIPOVERTY EFFECTIVENESS , 1994, National Tax Journal.

[42]  Jeffrey B. Liebman,et al.  THE IMPACT OF THE EARNED INCOME TAX , 1998 .