An Evaluation of Tax-Refund Splitting as an Asset-Building Tool for Low-to-Middle Income Individuals
The trend towards promoting asset accumulation among the poor has been gaining steam in recent years due to the emphasis on asset-building as a means to lift the poor out of poverty. This trend is a result of greater focus on the increasing wealth gap between high-income groups and low-income groups.
One way to build assets is to accumulate wealth through savings. Studies have shown that almost a quarter of the poor hold no financial assets at all. Obtaining higher savings would foster greater asset-accumulation, allowing the poor to build reserves for emergency use, plan for future expenses, and shield themselves against income shocks.
Savings as an asset-building tool for the poor is a step in the right direction. However, how to generate greater savings and for what population remains to be determined. Our client, the Doorways to Dreams Fund, established the Refunds to Assets (R2A) program to promote asset-building among the poor through tax refund splitting. Tax refund splitting is a pre-commitment from the tax refund recipient to put a portion of their tax refund into a savings account. Since tax refunds are one of the largest lump-sum payments from the government to low-to-middle income (LMI) households, tax refunds have the potential to become a powerful asset-building tool.
The R2A program is in its second-year of study. R2A II uses two tax site locations in Tulsa, Oklahoma and Brooklyn, New York to survey LMI individuals on their savings behavior, financial preferences, and financial condition. Participants were randomly assigned into treatment and control groups. We have been commissioned to answer the following questions:
- What is the take-up rate & savings generated from the R2A program?
- Is R2A targeting the right population of savers that should be saving?
- How can R2A increase its effectiveness in its marketing strategy?
To answer these questions, we analyzed survey and tax data from a randomized offering of R2A.
Key Findings
- While the take-up rate was relatively low this year, in the 5-8% range, those that did participate saved 236% more than they said they would before hearing about the program
- By a variety of measures, R2A does not appear to be encouraging refund saving among those who are in financial situations less suitable for saving.
- D2D should follow a marketing plan designed to decrease the cost of participation for the non-profits, increase the attractiveness of the program for government agencies, provide financial institutions with increased incentives to participate, and increase product desirability for program participants.