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									American Economic Review: Papers & Proceedings 2009, 99:2, 374–379

                     Did the 2008 Tax Rebates Stimulate Spending?

                                 By Matthew D. Shapiro and Joel Slemrod*

        In an effort to bolster economic performance                             I. 2008 Rebate: Survey Evidence
     in light of a looming downturn in economic
     activity, on February 13, 2008, President George                      The survey evidence is based on a rider on
     W. Bush signed the Economic Stimulus Act of                        the University of Michigan Survey Research
     2008. More than two-thirds of the $152 billion                     Center’s Monthly Survey, also known as the
     bill consisted of economic stimulus payments to                    Survey of Consumers. The survey provides a
     be sent beginning in May to approximately 130                      representative sample of US households. The
     million households. To qualify, recipients had to                  survey’s core content contains the questions
     have a valid Social Security number, an income                     about expectations of economy-wide and fam-
     tax liability, or at least $3,000 of “qualifying                   ily economic circumstances that are the basis of
     income” that included earned income and some                       the University of Michigan Index of Consumer
     benefits from Social Security, Veterans Affairs,                   Sentiment. Each month, the survey includes
     or Railroad Retirement, and have filed a 2007                      about 300 new respondents selected by random
     federal tax return. For the most part those who                    digit dial and 200 respondents reinterviewed
     filed as single individuals received between $300                  from six months earlier.
     and $600, while those who filed jointly received                      The rider to the survey was included each
     between $600 and $1,200. Additionally, par-                        month from February through June 2008. In
     ents with children under 17 who were eligible                      the first three months the questions were asked
     for a Child Tax Credit and had a Social Security                   before the rebate payments, while in the next
     number received an extra $300 per child. The                       two months the questions were asked while
     tax rebate phased out at higher levels of income,                  households were in the midst of receiving rebate
     as the payment was reduced by 5 percent of the                     checks. The tax rebate survey module begins by
     amount of adjusted gross income over $75,000                       briefly summarizing the tax policy change and
     for singles, or over $150,000 for married cou-                     the rebate, and then addresses the household
     ples. The Treasury remitted payments either by                     response to the rebate.1 Specifically,
     direct deposit, mainly in the first half of May,
     or by mail, mainly from mid-May through mid-                          Under this year’s economic stimulus pro-
     July.                                                                 gram tax rebates will be mailed or directly
        The effect of these stimulus payments depends                      deposited into a taxpayer’s bank account.
     on how much was spent. This paper reports new                         In most cases, the tax rebate will be six
                                                                           hundred dollars for individuals and twelve
     survey evidence on the propensity of consumers                        hundred dollars for married couples. Those
     to spend the 2008 rebate. It also relates the sur-                    with dependent children will receive an
     vey evidence to aggregate data and to evidence                        additional three hundred dollars per child.
     about spending from the 2001 tax rebate.                              Individuals earning more than seventy-
                                                                           five thousand dollars and married couples
                                                                           earning more than one hundred fifty thou-
        * Shapiro: Department of Economics, University of                  sand dollars will get smaller tax rebates
     Michigan, Ann Arbor, MI 48109-1220 (e-mail: shapiro@                  or no rebate at all. Thinking about your
     umich.edu); Slemrod: Department of Economics, University              (family’s) financial situation this year, will
     of Michigan, Ann Arbor, MI 48109-1220 (e-mail: jslemrod               the tax rebate lead you mostly to increase
     @umich.edu). We are grateful to Richard Curtin for advice
     in the design of the survey instrument, to Jonathan Parker
     and Nicholas Souleles for valuable discussion, and to
     Christian Broda and Jonathan Parker for providing a tab-              1
                                                                             Shapiro and Slemrod (1995, 2003a) use a similar
     ulation based on research in progress. Shapiro gratefully          survey to examine the spending from two earlier policies
     acknowledges the funding of National Institute on Aging            meant to provide stimulus by putting cash into the hands of
     grant 2-P01-AG10179 for partially supporting the data              consumers: the 1992 temporarily reduced income tax with-
     collection.                                                        holding and the 2001 tax rebates.
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                                      Table 1—Responses to 2008 Rebate Survey

                                                       Number of responses                     Percent
                Mostly spend                                 447                                 19.9
                Mostly save                                  715                                 31.8
                Mostly pay off debt                        1,083                                 48.2
                Will not get rebate                          212
                Don’t know/refused                            61
                Total                                      2,518                                100

                source: Survey of Consumers, February 2008 through June 2008.

   spending, mostly to increase saving, or                  that one-fifth of the 2008 rebate recipients
   mostly to pay off debt?                                  mostly spent the rebate translates into an aggre-
                                                            gate MPC of slightly less than one-third. This
   Table 1 gives the basic results of the survey            MPC of about one-third should be used in com-
about spending from the 2008 rebates. Because               paring the survey evidence to econometric evi-
there were no significant differences between               dence based on the response of consumption to
the answers provided in anticipation of receiving           rebates, or for calibration of a macroeconomic
a rebate (February to April) and those provided             model of the effects of the rebate.2
during the rebate remittance (May and June),                   The survey contains a number of covariates
we aggregate the answers over all five surveys.             that provide further implications of the spending
The first column of numbers gives the number                plans of households and can also serve to vali-
of responses to the survey (unweighted). Of the             date the survey responses. Table 2 shows how
2,518 individuals asked the rebate question, 61             the fraction reporting mostly spending the rebate
respondents (2.4 percent) either answered they              varies by age. There is a powerful correlation of
did not know what they planned to do with the               the fraction spending the rebate with age. Those
rebate or refused to answer. This low level of              over 65 are more than 11 percentage points more
item nonresponse suggests that individuals                  likely to report mostly spending the rebate than
did not have difficulty with the question. Two              those younger than 64. Overall there is a clear,
hundred twelve respondents (8.4 percent) said               monotonically increasing relationship between
they would not get the rebate. The last column              age and spending, which is what a life-cycle
of Table 1 gives the fraction reporting that the            model would predict for a temporary windfall.
rebate led them to mostly spend, save, or pay off              The policy discussion prior to the pas-
debt. Of those households receiving the rebate,             sage of the 2008 rebates presumed that low-
19.9 percent report that they will spend the                income households are particularly likely to
rebate, 31.8 percent report that they will mostly           increase their spending as a result of a rebate.
save the rebate, and 48.2 percent report that they          The Congressional Budget Office (2008, 7), in
will mostly pay debt with the rebate. Hence, the            its analysis of the options for stimulus in early
most common plan for the rebate is to use it to             2008, states, “Lower-income households are
pay off debt, and only one-fifth plan to mostly             more likely to be credit constrained and more
spend the rebate.                                           likely to be among those with the highest pro-
   Of course, households who will mostly save               pensity to spend. Therefore, policies aimed at
the rebate will do some spending, and vice                  lower-income households tend to have greater
versa. Hence, the fraction of households who
mostly spend does not necessarily equal the                    2
marginal propensity to consume (MPC) in the
                                                                 Survey answers might not reflect households’ actual
                                                            behavior. On this issue we are reassured by recent work by
population. Shapiro and Slemrod (2003b) infer               Christian Broda and Jonathan Parker that tracks cumula-
the aggregate MPC from a reasonable param-                  tive purchases recorded by scanners made during the five
eterization of the distribution of the MPC and              weeks after household receipt of the 2008 rebate. Based on
                                                            a survey question similar to ours, they find that spending
the presumption that individuals will respond to            increased by twice as much among those saying they had
the survey that they will mostly spend if their             mostly spent the rebate compared to those who said they
individual MPC exceeds one-half. The finding                mostly saved or paid down debt.
376                                   AEA PAPERs AND PROCEEDiNgs                                 mAY 2009

                                 Table 2—Spending the 2008 Rebate, by Age

            Age group                                                  Percent mostly spending
            29 or less                                                          11.7
            30–39                                                               14.2
            40–49                                                               16.9
            50–64                                                               19.9
            Age 64 or less                                                      17.0
            Age 65 or over                                                      28.4

                                Table 3—Spending the 2008 Rebate, by Income

            Income group                                               Percent mostly spending
            $20,000 and under                                                   17.8
            $20,001–$35,000                                                     21.0
            $35,001–$50,000                                                     16.6
            $50,001–$75,000                                                     18.7
            $75,001 and over                                                    21.4
            Refused to state income                                             23.9
            Total                                                               19.9

stimulative effects.” A Hamilton Project paper                II. 2008 Rebate: Aggregate Evidence
on stimulus options (Douglas W. Elmendorf and
Jason Furman 2008, 20) reaches the same con-              Because of the electronic disbursement of a
clusion. Table 3 examines the spending rate from       substantial fraction of the rebates, a very large
the 2008 rebate based on the survey responses.         amount of extra income reached households in a
It shows that the spending rate is not strongly        few months. Over 80 percent of the rebate was
related to income; indeed, the point estimate of       disbursed in May and June, so there was a sharp
the spending rate for the lowest-income group is       increase in disposable income in the second
smaller than the average.                              quarter of 2008. According to calculations by the
   Because the spending rate bounces up and            Bureau of Economic Analysis, the rebates added
down as a function of income, the correct infer-       $331.6 billion at an annual rate to income in the
ence from these data is that there is no dis-          second quarter of 2008 and $61.4 billion at an
cernible difference in spending propensity by          annual rate in the third quarter. These amounts are
income. Instead, the survey paints a picture of        2.2 percent and 0.4 percent of GDP in the second
low-income individuals who use a cash wind-            and third quarters of 2008, respectively. Given
fall to pay off debt. Of those earning less than       the magnitude of the stimulus payments, even if
$20,000, 58 percent planned to use the rebate          only a modest fraction was spent the payments
to mostly pay off debt. In contrast, 40 percent        would have given a boost to growth in the middle
of those with income greater than $75,000              of the year and then depressed growth toward the
planned to mostly pay off debt. This behavior is       end of the year as their effects dissipated.
consistent with the CBO’s suggestion that low-            Of course, quarter-to-quarter movements in
income consumers are liquidity constrained,            time series have multiple causes. For example,
but it suggests that low-income consumers face         in the second quarter of 2008 oil prices were
a liquidity constraint that will also be binding       skyrocketing, affecting both nondurable spend-
in the future. Hence, they place a premium on          ing (including on gasoline) and depressing the
using the rebate to improve their balance sheet.       demand for new automobiles. We pursue the
Put differently, low-income individuals are            survey evidence precisely because of the diffi-
needy today, but because they also are likely to       culty of using time-series analysis to understand
be needy in the future, they do not necessarily        the impact of one-time events such as the stimu-
use the windfall for current consumption.              lus payments.
VOL. 99 NO. 2                                              DiD thE 2008 tAx REBAtEs stimuLAtE sPENDiNg?                              377


                                                            Personal saving
                Percent of disposable income   5





                                                   Jan     Feb       Mar      Apr   May      Jun     Jul   Aug     Sep

                                                         Figure 1. Personal Saving and the 2008 Rebate

   Nonetheless, the official aggregate data on                                         other significant events in financial and credit
personal saving are broadly consistent with                                            markets during the year, it is hard to distinguish
most of the rebate being saved. Figure 1 shows                                         the effect of the rebate from other shocks.
the personal saving rate in the first nine months
of 2008. The solid line shows the official data                                             III. Looking Back at the 2001 Rebates
as published by the Bureau of Economic
Analysis. After hovering just above zero for                                              As part of the ten-year tax cut bill passed by
the first part of the year, the personal saving                                        Congress in the spring of 2001, the Treasury
rate spiked sharply in May, when the rebate                                            mailed tax rebate checks of up to $300 for single
program began, and through July it remained                                            individuals and up to $600 for households from
much higher than in previous months. Figure                                            late July through late September 2001. Shapiro
1 also shows the rebate payments as a per-                                             and Slemrod (2003a, b) report on the results of
cent of disposable income. Because we do not                                           a survey conducted in August, September, and
know the counterfactual—what saving would                                              October 2001. Only 21.8 percent of households
have been absent the rebate—the figure does                                            reported that the tax rebate would lead them to
not establish what fraction of the rebates was                                         mostly increase spending. As in the 2008 survey,
spent. Yet, that personal saving jumped by                                             there was no evidence that the spending rate was
nearly as much as the increase in the stimu-                                           higher for low-income households.
lus payments provides striking circumstantial                                             The aggregate data in 2001 show a spike in
evidence for little contemporaneous spending                                           the saving rate precisely at the same time the
from the rebates.                                                                      tax rebates were mailed in July, August, and
   We have also examined aggregate data on                                             September 2001. The situation becomes much
consumer credit for evidence of using the rebate                                       more complex beginning in September 2001.
to pay debt. There were distinct slowdowns in the                                      The saving rate remained high in September
growth in credit in 2008, but the timing of the                                        due to a reduction in spending while the nation’s
slowdowns does not exactly match the timing of                                         attention was riveted on the terrorist attack.
the rebate. Revolving credit outstanding slowed                                        October saw a recovery in spending in all cat-
in April; total credit fell in August. Given all the                                   egories of consumption, but especially for
378                               AEA PAPERs AND PROCEEDiNgs                                          mAY 2009

automobiles in response to the zero-percent           an increase in debt, though not a statistically
financing and other incentives offered by auto-       significant one.3
motive companies.                                        Both the CEX and credit card studies find
   Two studies of the 2001 tax rebate episode use     effects of the 2001 rebate on impact that are
the random timing of mailing the rebate to iden-      broadly consistent with the 2001 survey’s find-
tify the response to the rebate in microdata. David   ings. Both the survey and the CEX suggest that
Johnson, Parker, and Nicholas Souleles (2006)         the MPC over the first quarter after receipt of
measure the change in consumption caused by           the rebate is in the range of 30 to 40 percent.
the receipt of the rebate using a special module      The credit card evidence on debt repayment
of questions added to the Consumer Expenditure        supports the survey’s finding that some of the
Survey (CEX). The CEX module asked house-             rebate went to debt repayment, but it suggests
holds when they received the rebate checks and        that the debt repayment reversed after three
the amount of any rebate. The authors find that       months. Like the CEX findings, the credit card
total expenditures, including durable expendi-        evidence suggests a lagged increase in spending
tures such as auto and truck purchases, did not       following the rebate.
respond to the timing of the check receipt in a          Our surveys also provide evidence on lagged
statistically significant way. When expenditures      responses. Six months after the 2001 survey,
are restricted to exclude durable purchases, they     we added follow-up questions to a rider of the
do find a significant effect. Their results show      Survey of Consumers. Those who in the follow-
that, during the three-month period in which          up survey said that the rebate led them to mostly
the rebate was received, expenditures on non-         save or pay off debt were asked whether they
durable goods increased by 37 percent of the          would use the additional savings to make a pur-
rebate check amount. They also investigate the        chase later this year, or alternatively try to keep
longer-run responses of spending by looking at        up the higher savings (or lower debt) for at least
the effect in the second and third three-month        a year. The response was overwhelmingly the
periods after the receipt of the check. The two-      latter, with 85.3 percent and 93.4 percent plan-
quarter cumulative response to the rebate was         ning to maintain higher savings or lower debt,
estimated to be 69 percent. This estimate fig-        respectively (Shapiro and Slemrod 2003b). The
ured prominently in the policy discussion prior       2008 survey asks of those who said they would
to the 2008 rebate (see Elmendorf and Furman          mostly save the rebate, “Will you use the addi-
2008; Congressional Budget Office 2008). The          tional savings to make a purchase later this year,
standard error on this estimate is 26 percent, so     or will you try to keep up your higher savings for
the two standard deviation confidence interval        at least a year?” A parallel question was asked
on it runs from 17 percent to 121 percent. Hence,     of those who would mostly pay off debt. Most
the Johnson, Parker, and Souleles estimate of the     respondents reported that they would stick to
response of nondurable expenditures in the first      their plans to save or pay off debt. Of those who
quarter after the receipt of the checks is broadly    initially reported mostly saving, only 18.7 per-
consistent with what the survey responses in          cent said they would spend later. Of those who
Shapiro and Slemrod (2003a, b) suggest—an             initially report mostly paying off debt, only 7.8
MPC of about one-third. What differs is the           percent said they would spend later. Taking these
suggestion that consumption responses persisted       departures from the initially reported intentions
into the second, and even third, quarter after the    as spending, the ultimate “mostly spend” rate
receipt of the checks.                                from the rebate increases to 29.5 percent. Note
   Sumit Agarwal, Chunlin Liu, and Souleles           that the survey gives respondents an opportunity
(2007) also make use of the timing of the             to amend their answer from either saving or
receipt of the rebate checks to study payment         paying off debt to spending, but not vice versa.
of debt using a large sample of credit card           Because of this asymmetry, the follow-up
accounts from a financial institution. They find
that, on average, the consumers in their sample
initially increased their payments and thereby           3
                                                          Translating the magnitude of the responses they find to
paid down debt. The initial decline in debt is        an MPC is not feasible because the spending (and saving)
statistically significant. Debt stays lower for       they can measure—one credit card account—is only one
three months, after which the pattern shifts to       component of total spending (and saving).
VOL. 99 NO. 2                    DiD thE 2008 tAx REBAtEs stimuLAtE sPENDiNg?                    379

questions perhaps overstate the magnitude of        buck” as economic stimulus. Putting cash into
the shift in the direction of mostly spend.         the hands of the consumers who use it to save or
   In summary, the survey evidence and the evi-     pay off debt boosts their well-being, but it does
dence from microdata on actual spending and         not necessarily make them spend. In particular,
debt repayment tell very consistent stories for     low-income individuals were particularly likely
the contemporaneous, first-quarter, response to     to use the rebate to pay off debt. We speculate
the 2001 rebate: the MPC was between 30 and         that adverse shocks to housing and other wealth
40 percent. The conflict between the analyses of    may have focused consumers on rebuilding
microdata on actual spending and debt repay-        their balance sheets. Given the further decline
ment and the survey evidence concerns only the      of wealth since the 2008 rebates were imple-
lagged effects. While survey respondents report     mented, the impetus to save a windfall might be
only modest incremental spending, the CEX           even stronger now. Hence, those designing the
and credit card data suggest otherwise. We note,    next economic stimulus package should take
though, that in both studies the point estimates    into account that much of a temporary tax rebate
for cumulative spending come with substantial       is likely not to be spent.
uncertainty. Thus, even with large datasets such
as the CEX or the credit card data, and the inno-                   REFERENCES
vative research design of Johnson, Parker, and
Souleles and Agarwal, Liu, and Souleles, it is      Agarwal, Sumit, Chunlin Liu, and Nicholas S.
difficult to make precise inferences about the        Souleles. 2007. “The Reaction of Consumer
magnitude of the lagged effects of the rebate.        Spending and Debt to Tax Rebates—Evidence
                                                      from Consumer Credit Data.” Journal of Polit-
                IV. Conclusion                        ical Economy, 115(6): 986–1019.
                                                    Congressional Budget Office. 2008. “Options for
   Only one-fifth of survey respondents said          Responding to Short-Term Economic Weak-
that the 2008 tax rebates would lead them to          ness.” Washington, DC: Congressional Budget
mostly increase spending. Most respondents            Office.
said they would either mostly save the rebate       Elmendorf, Douglas W., and Jason Furman. 2008.
or mostly use it to pay off debt. The most com-       if, When, how: A Primer on Fiscal stimulus.
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The survey estimates imply that the marginal        Johnson, David S., Jonathan A. Parker, and Nich-
propensity to spend from the rebate was about         olas S. Souleles. 2006. “Household Expenditure
one-third and that there would not be substan-        and the Income Tax Rebates of 2001.” Ameri-
tially more spending as a lagged effect of the        can Economic Review, 96(5): 1589–1610.
rebates. Nonetheless, the aggregate amounts of      Shapiro, Matthew D., and Joel Slemrod. 1995.
the rebates were large enough that they would         “Consumer Response to the Timing of Income:
have had a noticeable effect on the timing of         Evidence from a Change in Tax Withholding.”
GDP and consumption growth in the second              American Economic Review, 85(1): 274–83.
and third quarters of 2008, even if only one-       Shapiro, Matthew D., and Joel Slemrod. 2003a.
third of the rebates were spent. Growth in the        “Consumer Response to Tax Rebates.” Ameri-
second quarter was stronger and growth in the         can Economic Review, 93(1): 381–96.
third quarter was weaker than they would have       Shapiro, Matthew D., and Joel Slemrod. 2003b.
been absent the rebate.                               “Did the 2001 Tax Rebate Stimulate Spend-
   Because of the low spending propensity, the        ing? Evidence from Taxpayer Surveys.” tax
rebates in 2008 provided low “bang for the            Policy and the Economy, 17: 83–109.

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