Investing in Infants: Lasting Effects of Cash Transfers to New Families

Barr, Eggleston, and Smith (2022) provides causal estimates of the long-term effects of cash transfers to first-time parents within the first year of their children’s lives. The paper employs a regression discontinuity design to exploit this eligibility cut off and estimate the effects of additional aid received from the EITC during the first year of life.

The United States Federal Earned Income Tax Credit (EITC) was introduced to provide financial aid to low-to moderate-income workers and families in the form of an annual tax credit. There are a number of ways to qualify for the EITC, but the most frequent beneficiaries are those under a designated income threshold who can claim dependents. For a dependent to be claimed on the tax return for year X, they must have been born during that year (that is, before December 31^st). Any children born after December 31^st may not be claimed as dependents until filing for tax year X+1. Therefore, parents of children born just before the cutoff will qualify for the EITC in year X, while those with children born just after the cutoff will not qualify until the following year.

The paper finds children born just before the cutoff earn 1-2 percent more in their 20s per $1,000 USD received during infancy. The paper also finds evidence that the liquidity increases during the critical period following childbirth leads to persistent increases in family income, which may have contributed to the increases in future income for children.