Randomized Income

This was the most recent study on the consumer reaction to 2001 tax rebate reviewed. This study was based on the argument that the most part of consumer theories suggest that consumer consumption expenditures should not increase in response to a temporary change in tax policy. They contend that the expected line of action would be that consumers would increase spending in anticipation of an upcoming tax cut, and not necessarily wait for the actual take home pay to increase; and that further increase in consumer spending should be spread out over consumer’s entire lifetime.

In testing this hypothesis, survey instrument was employed. Special questions measuring consumer spending reactions to the rebate were included to the Consumer Expenditure Survey and administered on a representative sample of the US population. The study found that about 20-40 percent of households spent the rebate on nondurable goods, with the most significant population from the ‘liquidity constraint’ group.

Only small expenditure increases were recorded in the second and third quarter after the rebate receipt, indicating that the effect only lasted, significantly, within the quarter the rebate were checks sent. The study concluded that they aggregate spending increased in response to the rebate, though they admitted that the most part of the spending came from the low income group. Shapiro, D. Matthew and Joel Slemrod (2001). Consumer Response To Tax Rebates. National Bureau Of Economic Research (NBER), Working Paper 8672, December.

This was the most extensive study on consumer spending reaction to the 2001 rebate reviewed. The authors contend that using the standard economic theory to evaluate consumer reactions to income changes, indicates that consumer responses will depend on whether the change in income was expected or not, and on whether the change in temporary or permanent. So, to test the reactions of consumers to the increase in income due to the tax rebates of 2001, the authors employed a survey instrument.

They explain that the survey instrument used was a rider on the University of Michigan Survey Research Center’s Monthly Survey (Survey of Consumers), with questions designed to elicit consumer spending behavior and to test liquidity patterns that could explain the spending pattern. The questionnaire was intended to determine if consumers will spend the rebate or not. The research showed that only about 22 percent of the respondent would or had spent the rebates. Of the remainder, 59 percent would pay debts with the rebate money, while the other 41 percent would use the rebate to increase their savings.

However, unlike Johnson et al. , this study indicated that there was no ‘liquidity constraint’ significance in the spending. Professor Vernarelli, Michael (2007). A Macroeconomic Policy Analysis Of The First Presidency Of George W. Bush Intermediate Macroeconomic Theory. National Bureau Of Economic Research (NBER). This paper gave a vivid illustration of the macro economic environments under which the Bush administration was inaugurated and the policies that shaped the first tenure of the administration.

The author explained that the tax cuts and huge Social Security spending that characterized the Gush administration was birthed during the campaign periods when the US economy was still experiencing a boom, as evidenced from the budget surpluses under the Clinton administration. The paper also presented a vivid illustration of the politics and policies that gave birth to the economic growth witnessed under the Clinton administration, how this influenced Bush’s administration and the goal behind tax cuts and rebates.

Auerbach, J. Alan (2002). The Bush Tax Cut and National Saving. Department of Economics, University of California. Paper was prepared for the National Tax Association in Washington DC. JEL Nos. E62, D91. This paper presented a different dimension to the study of consumer spending reaction to the 2001 rebates. While several other studies measured the increase or lack of, of consumer spending in response to the rebate, this paper employed aggregate national savings as the instrument to measure consumer response to the rebate.

The author argued that one of the primary goals of lower tax policy is to stimulate economic activity and thereby increasing productivity. Also, an important behavioral response to lower taxes is increased savings, which influences future productivity and living standards through capital deepening. Thus, to analyze the effects of the tax rebates on consumer savings and other macroeconomic variables, the study employed the Auerbach-Kotlikoff in conjunction with the NBER’s TAXSIM model which has the capacity to incorporate the behavior of firms, government and forward-looking households in its measurement of tax reforms.

The study reported that the tax cut may increase savings in the short run, depending on the assumptions used in the simulation model. It is also capable of increasing output in the short term, due to its effect on labor supply, however, on the long term savings are likely to fall once the revenue losses generated by the tax cut are confronted through necessary policy changes, except if the revenue loss are entirely offset by reductions in government spending. Agarwal, Sumit, Chunlin Liu and Nicholas S.

Souleles (2004). The Reaction of Consumer Spending and Debt to Tax Rebates –Evidence from Consumer Credit Data. National Bureau Of Economic Research (NBER), June. JEL Nos. E21, E51, E62, H31. This paper also studies consumer spending response to the tax rebate of 2001, although using an entirely different data source. The authors assert that their study ‘uses a unique new panel dataset of credit card accounts to analyze how consumers respond to ‘lumpy’ increases in income like tax rebates.

’ The specific research question was ‘to what extent did consumers use the 2001 income tax rebates to increase spending or to pay down debt? ’ using a distributed lag model which estimated the month by month response of credit card payments, spending and debt payment to the receipt of the rebates and by also incorporating the randomized distribution pattern of the rebate distribution into the model, the study showed that consumer response varied over time.

It was reported that the initial response to the income increase was increased saving, as evident from increased credit card payment. However, over time, increased spending amounting to about 40 percent of the rebate was recorded over a nine month period, which returned the debt level to the pre-rebate level. The important facts in this study is that, one, the rebate money initially triggered increased consumer savings (not spending) and two, the increased spending was witnessed significantly among the ‘liquidity constrained’ group and was mostly on nondurable goods.