Tax Rebates: Economic Boost or Financial Drain?

1. Tax Rebates:Economic Boost or Financial Drain? By Todd Crabtree

2. The Question: Did the 2001 automatic tax refund achieve the desired effect of Congress--stimulating the economy by encouraging consumer spending--and can they expect the 2008 stimulus package to have the same effect?

3. Presentation Outline • 2001 tax rebate: • Purpose • Statistics • Successful? • 2008 tax rebate: • Purpose • Statistics • Successful? • References

4. 2001 Rebate -- Purpose • Economic Growth and Tax Relief Reconciliation Act of 2001 • Purpose: • Stimulate poor economy • Get disposable income into the hands of those most likely to spend it • Boost the ratings of politicians

5. 2001 Rebate -- Statistics • Rebate checks of $300 or $600 • Checks sent to 92 million households • $38 billion refunded • No income requirements • Part of 10 year tax reduction (Shapiro & Slemrod, 2003, p. 382)

6. 2001 Rebate -- Success? • Conflicting Studies: • Study showing it was not: • University of Michigan Economists • Studies showing it was: • Federal Reserve Bank with Universities of Pennsylvania & Nevada • Bureau of Labor Statistics with Universities of Princeton & Pennsylvania

7. 2001 Rebate • 78% planned to save (Shapiro & Slemrod, 2003, p. 384) OR • 67% spent within 6 months (Johnson, Parker & Souleles, 2004, p. 2) • Which study correct? • Key statement: • UM study did not intend to show the physical link between rebates and spending but spending habits (Shapiro & Slemrod, 2003, p. 383)

8. 2008 Rebate -- Purpose • Economic Stimulus Act of 2008 • Purpose: • Stimulate poor economy • Get disposable income into the hands of those most likely to spend it • Boost the ratings of politicians

9. 2008 Rebate -- Statistics • Rebate checks of $600 to $1,200 • Plus $300 for each child • Checks will be sent to 130 million households • $168 billion will be refunded in 2008 • Minimum income of $3,000 • One-time rebate only (Library of Congress, 2008)

10. 2008 Rebate -- Successful? • Lots of money into economy • Especially to low income households • Makes politicians look good • Recession: different cause than 2001 • Housing bubble and lenders • Is more money the solution? Or is it increasing future problems? (Knowledge@Wharton, 2008)

11. References Agarwal, S., Liu, C., & Souleles, N. (2007, December). The reaction of consumer spending and debt to tax rebates – evidence from consumer credit data [Online version]. Federal Reserve Bank of Chicago Working Paper Series, WP 2007-10. Retrieved February 11, 2008 from: http://www.chicagofed.org/publications/workingpapers/wp2007_10.pdf Johnson, D., Parker, A., & Souleles, N. (2004, August). Household expenditure and the income tax rebates of 2001 [Online version]. Princeton University Discussion Papers in Economics, Discussion Paper #231. Retrieved February 11, 2008 from: http://www.wws.princeton.edu/econdp/pdf/dp231.pdf Knowledge@Wharton. (2008, February 20). The economic stimulus package: Will it work, and for whom? Retrieved February 21, 2008 from:http://knowledge.wharton.upenn.edu/article.cfm?articleid=1904 Library of Congress. (2008). House resolution 5140: Economic stimulus act of 2008, section 6428. Retrieved March 17, 2008 from: http://thomas.loc.gov/cgibin/query/F?c110:5:./temp/~c1100PeS1Y:e1754: Shapiro, M., & Slemrod, J. (2003, March). Consumer response to tax rebates [Online version]. The American Economic Review, 45 (1). Retrieved February 5, 2008 from JSTOR database: http://www.jstor.org