Does the EITC crowd out financial assistance from parents?

The Earned Income Tax Credit (EITC) is the largest cash transfer program to low-income working adults in the United States, worth over $60B annually. Financial support from parents to their adult children in the form of inter vivos transfers is worth a similar magnitude, over $80B. Yet we have no evidence on whether increasing public transfers from the EITC crowds out private transfers from parents to adult children. We use the Health and Retirement Study (HRS) and a simulated benefit approach to answer this question. We find no evidence that the EITC crowds out private financial transfers. Instead, we find that increased EITC generosity increases the money unmarried mothers receive from their own parents. Consistent with previous work, EITC generosity also increases the likelihood that parents help their unmarried daughters with childcare so increases in financial transfers are not a substitute for decreasing time help. Our findings lend support to theories of intergenerational transfers that focus on parents’ role in easing credit constraints and supporting children as they transition into the labor market and suggest that some of the positive effects of the EITC may be amplified by increases in parental financial support.

Katherine Michelmore is an associate professor of public policy at the University of Michigan’s Gerald R. Ford School of Public Policy. Michelmore is a leading scholar and educator on the social safety net, education policy, labor economics, and economic demography. A research associate at NBER, she is a recognized expert on the efficacy of the Earned Income Tax Credit and its impact on children.