Working Paper: NBER ID: w10784
Authors: David S. Johnson; Jonathan A. Parker; Nicholas S. Souleles
Abstract: Under the Economic Growth and Tax Relief Reconciliation Act of 2001, most U.S. taxpayers received a tax rebate between July and September, 2001. The week in which the rebate was mailed was based on the second-to-last digit of the taxpayer's Social Security number, a digit that is effectively randomly assigned. Using special questions about the rebates added to the Consumer Expenditure Survey, we exploit this historically unique experiment to measure the change in consumption expenditures caused by receipt of the rebate and to test the Permanent Income Hypothesis and related models. We find that households spent about 20-40 percent of their rebates on non-durable goods during the three-month period in which their rebates were received, and roughly another third of their rebates during the subsequent three-month period. The implied effects on aggregate consumption demand are significant. The estimated responses are largest for households with relatively low liquid wealth and low income, consistent with liquidity constraints.
Keywords: Tax Rebates; Household Expenditure; Permanent Income Hypothesis
JEL Codes: E21; E62; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Rebate receipt (H20) | Household spending on nondurable goods (D19) |
| Household spending during the quarter of receipt (D19) | Household spending in the subsequent three-month period (D12) |
| Tax rebates (H20) | Household consumption expenditures (D10) |
| Low liquid wealth (E21) | Household consumption expenditures (D10) |
| Tax rebates (H20) | Aggregate consumption expenditures (E20) |