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Does changing the timing of a yearly individual tax refund change the amount spent vs. saved?

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  • Chambers, Valrie
  • Spencer, Marilyn
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    Abstract

    The empirical evidence surrounding whether federal income tax refunds predominantly stimulate consumer spending or saving remains contradictory. This study is an attempt to combine income tax research findings with research on mental accounting and with the effects of estimated tax payments timing. The authors developed and administered an experiment, using college students as subjects, to test whether tax refunds administered as one lump-sum will be saved (vs. spent) more than tax refunds of the same amount refunded monthly through revised income tax withholding tables. The study also explores the types of saving and spending that result from refunds under both timing patterns. A within subjects experiment of student spending was used, and ANOVA results confirm that a refund delivered in monthly amounts (for example, by changing the federal income tax withholding tables) stimulated current spending more than if the same yearly total tax reduction was delivered in one lump-sum. The findings also suggest that the lump-sum distribution conversely will stimulate private saving more than a monthly distribution will. The study also explores other specific savings and spending tendencies, including the payment of credit cards vs. investments in securities, and the amount spent on durable goods vs. monthly expenditures across several monthly and yearly distributions. It is important to know if and how the timing of refunds affects savings and spending tendencies because tax cuts are often debated on the political stage as a means to stimulate spending, and the timing of the refund might change how effectively a tax cut meets that goal.

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    File URL: http://www.sciencedirect.com/science/article/B6V8H-4S7BD9R-2/2/8cff11facdc8907bc5ec980cf9b98182
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Psychology.

    Volume (Year): 29 (2008)
    Issue (Month): 6 (December)
    Pages: 856-862
    Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
    Handle: RePEc:eee:joepsy:v:29:y:2008:i:6:p:856-862

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    Web page: http://www.elsevier.com/locate/joep

    For corrections or technical questions regarding this item, or to correct its listing, contact: (Jeroen Loos).

    Related research

    Keywords: Decision making Consumer behavior Economics Mental accounting Tax;

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    Cited by:
    1. William Congdon & Jeffrey R. Kling & Sendhil Mullainathan, 2009. "Behavioral Economics and Tax Policy," NBER Working Papers 15328, National Bureau of Economic Research, Inc.
    2. Alan J. Auerbach & William G. Gale, 2009. "Activist Fiscal Policy to Stabilize Economic Activity," NBER Working Papers 15407, National Bureau of Economic Research, Inc.

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