Cash Transfers and Financial Inclusion: Evidence from the U.S. Earned Income Tax Credit

• In Event: Tax Policy and Intergenerational Family Wellbeing

Abstract

Access to formal financial services is foundational to economic stability and mobility, yet millions of American households remain unbanked or reliant on costly alternative financial services (AFS) such as payday lenders, pawnshops, and check-cashing outlets. Despite decades of growth in both the financial sector and federal antipoverty programs, these gaps persist disproportionately among low-income households and racial and ethnic minorities. Understanding whether income support policies can shift household financial behavior is essential for designing effective, equitable policy.

This paper asks: Does expanding government cash transfers promote financial inclusion in the United States? Specifically, I examine whether more generous Earned Income Tax Credit (EITC) schedules increase participation in the formal banking system and reduce reliance on high-cost alternative financial services. In doing so, this paper connects a rich literature on the EITC's effects on labor supply, health, and household well-being with a growing literature documenting structural and behavioral barriers to banking access among low-income and minority households.

The analysis draws on repeated cross-sections of the FDIC National Survey of Unbanked and Underbanked Households linked to Current Population Survey microdata covering 2009–2023, yielding a sample of over 80,000 households. I construct the maximum EITC benefit available to each household using statutory rules from the Tax Policy Center, generating policy-driven variation across states, years, family sizes, and marital status.

The core empirical strategy exploits this variation in a reduced-form design that directly estimates the effect of EITC generosity on financial outcomes, the policy-relevant quantity of interest. To examine whether income is the primary channel through which generosity operates, I complement this with an instrumental variables approach that isolates income variation driven by policy rather than household choices.

The reduced-form results show that a $1,000 increase in EITC generosity raises the probability of being banked by roughly 2 percent and of being fully banked, defined as holding a bank account while relying primarily on mainstream rather than non-bank financial products, by approximately 5 percent, while reducing AFS use by about 9 percent. The close alignment between reduced-form and IV estimates suggests these effects operate primarily through increased disposable income rather than program salience or administrative channels. Minority households, particularly Black and Hispanic families, exhibit proportionally larger gains in entry-level banking participation, consistent with tighter baseline liquidity constraints and higher structural barriers to formal banking. However, this racial heterogeneity cuts both ways: while minority households respond more strongly on entry-level outcomes, they remain significantly less likely to benefit from mortgage ownership or digital banking engagement, reflecting enduring disparities in financial infrastructure and opportunity. More broadly, EITC generosity has no significant average effect on credit access, mortgage ownership, digital banking adoption, or savings accumulation.

These findings carry direct implications for financial inclusion policy. The EITC effectively functions as an entry-level inclusion tool, but the persistence of racial gaps in deeper financial outcomes underscores that broader financial empowerment requires complementary interventions, including low-fee account products, expanded affordable credit, and investments in digital access, particularly for communities facing enduring structural inequities.

Author

• Mardoche Ayitchehou, University of Pittsburgh
  Presenting Author