If last year's tax
rebates are any indication, one-time payments from the government are a weak
economic stimulus, say economists at the University of Michigan.
The rebates in
2008 provided low 'bang for the buck' as an economic stimulus, says Joel
Slemrod, professor of business economics at U-M's Ross School of Business and
director of the Office of Tax Policy Research. Putting cash into the hands
of the consumers who use it to save or pay off debt boosts their well-being,
but it does not necessarily make them spend.
U-M/Reuters Survey of Consumers, Slemrod and colleague Matthew Shapiro asked
more than 2,500 Americans what they did with their 2008 federal income tax
rebates, which accounted for more than two-thirds of the $152 billion Economic
Stimulus Act of 2008. For the most part, those who filed taxes as single
individuals received between $300 and $600, while those who filed jointly got
between $600 and $1,200. In addition, parents with children under 17 received
an extra $300 per child.
The U-M economists
found that only 20 percent of U.S. households mostly spent their tax rebates,
while about 48 percent used their rebate mostly to pay debt and roughly 32
percent mostly saved their rebate checks.
Americans 65 and
older were more likely to spend their rebates, Slemrod and Shapiro say. More
than 28 percent of this age group mostly spent the money, compared to only 17
percent of Americans under 65. They found little evidence that spending is
related to income, except for those earning less than $20,000 a year -- 58
percent used the rebate to pay off debt, compared with 40 percent of those with
incomes above $75,000.
Slemrod and Shapiro
say the overall results are similar to what they found in an earlier study of
the 2001 federal income tax rebates, when about 22 percent of Americans mostly
spent their rebates.
adverse shocks to housing and other wealth may have focused consumers on
rebuilding their balance sheets in 2008, Slemrod says. Given the
further decline of wealth since the rebates were implemented, the impetus to
save a windfall might be even stronger now.
designing the next economic stimulus package should take into account that much
of a temporary tax rebate is likely not to be spent, Shapiro says.
Instead, tax changes that give a sustained boost to purchasing power of
households are more likely to be effective.