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Check in the Mail or More in the Paycheck: Does the Effectiveness of Fiscal Stimulus Depend on How It Is Delivered?

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Author Info

  • Claudia R. Sahm

    ()

  • Matthew D. Shapiro

    ()

  • Joel Slemrod

    ()

Abstract

Recent fiscal policies have aimed to stimulate household spending. In 2008, most households received one-time economic stimulus payments. In 2009, most working households received the Making Work Pay tax credit in the form of reduced withholding; other households, mainly retirees, received one-time payments. This paper quantifies the spending response to these different policies and examines whether the spending response differed according to whether the stimulus was delivered as a one-time payment or as a flow of payments in the form of reduced withholding. Based on responses from a representative sample of households in the Thomson Reuters/University of Michigan Surveys of Consumers, the paper finds that the reduction in withholding led to a substantially lower rate of spending than the one-time payments. Specifically, 25 percent of households reported that the one-time economic stimulus payment in 2008 led them to mostly increase their spending while only 13 percent reported that the extra pay from the lower withholding in 2009 led them to mostly increase their spending. The paper uses several approaches to isolate the effect of the delivery mechanism from the changing aggregate and individual conditions. Responses to a hypothetical stimulus in 2009, examination of ?free responses? concerning differing responses to the policies, and regression analysis controlling for individual economic conditions and demographics all support the primary importance of the income delivery mechanism in determining the spending response to the policies.

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File URL: http://www.bcl.lu/fr/publications/cahiers_etudes/53/BCLWP053.pdf
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Bibliographic Info

Paper provided by Central Bank of Luxembourg in its series BCL working papers with number 53.

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Length: 46 pages
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:bcl:bclwop:bclwp053

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Web page: http://www.bcl.lu/

Related research

Keywords: Fiscal stimulus; tax rebates; marginal propensity to consume; survey responses;

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References

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  1. David S. Johnson & Jonathan A. Parker & Nicholas S. Souleles, 2004. "Household Expenditure and the Income Tax Rebates of 2001," NBER Working Papers 10784, National Bureau of Economic Research, Inc.
  2. Jonathan A. Parker, 1999. "The Reaction of Household Consumption to Predictable Changes in Social Security Taxes," American Economic Review, American Economic Association, vol. 89(4), pages 959-973, September.
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Cited by:
  1. Cwik, Tobias & Wieland, Volker, 2009. "Keynesian government spending multipliers and spillovers in the euro area," CEPR Discussion Papers 7389, C.E.P.R. Discussion Papers.
  2. Christopher D. Carroll, 2012. "Implications of Wealth Heterogeneity For Macroeconomics," Economics Working Paper Archive 597, The Johns Hopkins University,Department of Economics.
  3. Grant Graziani & Wilbert van der Klaauw & Basit Zafar, 2013. "A boost in the paycheck: survey evidence on workers’ response to the 2011 payroll tax cuts," Staff Reports 592, Federal Reserve Bank of New York.

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