Does Cash Buy Credit? Evidence from the Timing of Child-Related Tax Benefits

• In Event: The Child Penalty and Work-Family Policy: Paid Family Leave and Paid Sick Leave

Abstract

Many families are financially fragile after the birth of a first child. Child-related tax benefits, among the largest cash transfers to working families in the United States, are designed to support precisely such families, but they arrive only once a year, after the family files its tax return, and so may not reach families when their liquidity is most constrained. This paper asks whether the timing of these transfers matters: does receiving the same benefits about a year earlier have lasting effects on family finances?
I link nearly two decades of California birth records to first-time parents' credit reports, drawn from a quarterly credit bureau panel that follows each parent from before the pregnancy through the child's third year. A child born in late December can be claimed on that year's tax return, so the family receives its first benefits the following spring, while an otherwise similar family whose child is born in early January waits an additional year. This feature motivates my empirical strategy of a regression discontinuity design. To focus on families most likely to be liquidity constrained, I estimate separately for financially vulnerable mothers, those with weak credit scores before the birth, and their non-vulnerable counterparts.
Among financially vulnerable mothers, earlier receipt produces gains that persist through the third year after the birth: debt in collections is $60 (8%) lower, credit limits are $436 (4%) higher, and credit card balances are $212 (5%) higher. The gains also arrive in a telling order: collections fall once the benefits arrive, credit limits climb over the following quarters, and balances follow about a year later, taking up just under half of the new limit. I also find suggestive evidence that mortgage holding rises once credit has improved and that the credit expansion extends to the household as a whole. Non-vulnerable mothers show no comparable response.
The pattern is more consistent with a relaxed borrowing constraint than with distress borrowing: credit scores converge across the two groups within a few years, while the expanded credit lines remain. The results suggest that when benefits reach families, and not only how much they receive, matters for liquidity-constrained households.

Author

• Letian Yin, University of California San Diego
  Presenting Author