We feel like we should drill down a little deeper with some of our recent comments about the ineffectiveness of tax rebates, especially in 2001, the last time they were used as a stimulus tool.
From Marginal Revolution:
Matt Shapiro and Joel Slemrod report:
Many households received income tax rebates in 2001 of $300 or $600. These rebates represented advance payments of the tax cut from the new 10 percent tax bracket. Based on a survey of a representative sample of households, this paper finds that only 22 percent of households receiving the rebate would spent it. Instead, they would either save it or use it to pay off debt. This very low rate of spending represents a striking break with past behavior, which would have suggested a much higher rate of spending. The low spending rate implies that the tax rebate provided a very limited stimulus to aggregate demand.
With tax rebates, the government is betting on people -- especially the poorest people -- spend ing most of the rebate in consumer activities, e.g., at the mall, eating out, online.
If recipients use checks to boost their savings accounts or pay off credit card debt, the rebates are rendered ineffective. (Rising credit card debt may actually explain the growing ineffectiveness of tax rebates.)
In any event, rebates are a very expensive experiment if you're not sure they'll do any good.
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