Likely Effects of the Tax Rebate Checks

Following my recent musings about the tax rebate checks, several people asked about the likely economic consequences of this sort of policy.

My friend and colleague, Nick Souleles, is one of the leading experts on these matters, so I asked him for a short primer on what we learned from when rebate checks were sent out in 2001.

Here is a list of three of the best recent contributions, in chronological order. Taken as a group, they both provide some useful guidance, and highlight remaining uncertainties — and the thing I really like is how these papers highlight some of the ways in which economists are willing to get their hands dirty with some particularly innovative research strategies.

1. “Consumer Response to Tax Rebates,” by Matthew Shapiro and Joel Slemrod, American Economic Review, 93(1), March 2003.

The authors use a fairly direct way of figuring out the effects of the 2001 rebate checks: They ask people.

The answer: Around one-quarter planned on spending it, one-third planned to save, and the rest were planning on using it to pay off debt. Interestingly, the rich were more likely to spend the rebate, while those on lower incomes planned on paying off debt.

2. “Household Expenditure and the Income Tax Rebates of 2001,” by David Johnson, Jonathan Parker and Nicholas Souleles, American Economic Review, 96(5), December 2006. A nice summary from the N.B.E.R. Reporter is available here.

This paper shows some real ingenuity: the authors note that the 2001 tax rebate checks were sent out over a ten-week period, with the date depending on the second-to-last digit of your social security number, which is effectively a random number. Sensing a research opportunity, the authors persuaded the B.L.S. to add some questions to the Consumer Expenditure Survey, allowing them to compare the timing of the rebate payment and the timing of expenditures.

All told, they estimate that on average around two-thirds of the rebate was spent during the ten-week disbursement period and the subsequent three months. Interestingly, around a third of the total response came from a rise in spending on clothes.

3. “The Reaction of Consumer Spending and Debt to Tax Rebates — Evidence from Consumer Credit Data,” by Sumit Agarwal, Chunlin Liu and Nicholas Souleles, Journal of Political Economy, 115(6), December 2007 (un-gated version here).

This paper begins with one particularly compelling observation: credit card companies know our social security numbers (and hence who got their rebates when), and they also know a lot about our spending and saving patterns.

And so once the authors were able to get a large credit card company to share with them (anonymized) data, their research project was made.

Recall that paper #1 had found that nearly half of all respondents expected to use the rebate to pay down their debt. It turns out that this was the initial response of many, but then over the ensuing nine months, spending rose by enough to account for around two-fifths of the average rebate. And for those who were liquidity constrained, spending rose even further.


AD

I don't think these tax rebates or incentives really change my spending patterns at all. I don't carry any debt and all my savings contributions are automatic. When I spend money beyond necessities, I do so with the comfort in knowing that I am not spending money I don't have and that before it hit my checking account a portion of it automatically went towards my 401k and other savings vehicles.

iratecat

Brenda:
On the bright side, plenty of those Korean kids are moving to the U.S. -- just take a peek at any UC campus.

Joe

I don't understand the point of these tax rebates. Maybe I'm just not getting this. I mean if they are trying to increase consumption they should just lower taxes. This way consumers wont have this extra check in their hand they're just going to save. If the money was just given back indirectly by lowering taxes, it's more likely it would be spent. If it looks like the economy is going into a recession of course Americans are going to save as much as they can. The only way to increase consumption is to indirectly change income in a way that all the extra cash will be spent not saved :S

Brian

As a small business owner I'm starting to see a positive effect. More people are booking clowns this month than ever before. No, I'm not kidding. I even did a press release on it - but so far the Bush administration is not playing up the clown angle.
Here's the release:
http://www.prlog.org/10069765-party-clowns-to-stimulate-economy-with-tax-rebate-checks.html

CS

MAKE A DIFFERENCE, DONATE REBATE TO YOUR FAVORITE CHARITY-
I found a great website called 08donate. Its a growing movement of Americans who want to make a real difference with their rebates- they are donating them to the charities of their choice. The site has tools to help you find a charity you would like to give to, and fun ways to spread this great giving message. 1f even 1% of the rebate gets donated that 1.5 billion dollars out there fighting hunger, protecting the planet, accelerating peace and supporting many other worthy causes. 08Donate ...timely idea! Tell your friends.

I cant wait to donate my rebate.

Bonnie

So if we owed 500.00 on our 2007 taxes, will they take the 500 out of the rebate check and send the rest to us? It was suppose to be 1200.00. thats what I'm hoping will happen. It was supposed to be in our checking account on May 16th but nothing so far?

KB

This is quite interesting mainly because of the fact that these rebate checks sent out during the beginning of the 2nd quarter of 2008 is happening again now, except with government money going directly to mortgage companies across the nation. As far as rebate checks are concerned, I agree that they will not have a long term effect mainly because of the fact that Americans have become very smart with their money: they won't spend it on luxery goods if they can pay off debt that they have accumulated. My question is: When will the government start making decisions that will REALLY help the economy? I am very scared about what the US is going to look like in five years if these kinds of plans keep occurring.