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Is a Tax Rebate an Effective Tool for Combating a Recession?: A Reply to Shapiro and Slemrod

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Author Info

  • Laurence S. Seidman

    ()
    (Department of Economics,University of Delaware)

  • Kenneth A. Lewis

    ()
    (Department of Economics, University of Delaware)

Abstract

The purpose of this paper is to reply to Shapiro and Slemrod's recent article in the American Economic Review (March 2003) and address the broader issue: Is a tax rebate an effective tool for combating a recession? We make three points. First, there are serious problems with their consumer surveys. Second, they do not obtain any direct evidence on the marginal propensity to consume (MPC) out of the rebate. Third, even if their survey results were valid, simulations show that a tax rebate twice as large repeated for four quarters would have significantly mitigated the 2001 recession. Thus, their negative conclusion about the effectiveness of counter-cyclical fiscal policy is unwarranted.

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File URL: http://graduate.lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2003/UDWP2003-15.pdf
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Bibliographic Info

Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 03-15.

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Length: 29 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:dlw:wpaper:03-15

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Postal: Purnell Hall, Newark, Delaware 19716
Phone: (302) 831-2565
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Web page: http://www.lerner.udel.edu/departments/economics/department-economics/
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Related research

Keywords: Recession; Counter-Cyclical Fiscal Policy; Tax Rebate;

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References

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  1. Seidman, Laurence S & Lewis, Kenneth A, 2002. "A New Design for Automatic Fiscal Policy," International Finance, Wiley Blackwell, vol. 5(2), pages 251-84, Summer.
  2. repec:rus:hseeco:95340 is not listed on IDEAS
  3. Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, vol. 89(4), pages 947-958, September.
  4. Shapiro, Matthew D & Slemrod, Joel, 1995. "Consumer Response to the Timing of Income: Evidence from a Change in Tax Withholding," American Economic Review, American Economic Association, vol. 85(1), pages 274-83, March.
  5. Souleles, Nicholas S., 2002. "Consumer response to the Reagan tax cuts," Journal of Public Economics, Elsevier, vol. 85(1), pages 99-120, July.
  6. N. Gregory Mankiw, 2000. "The Savers-Spenders Theory of Fiscal Policy," American Economic Review, American Economic Association, vol. 90(2), pages 120-125, May.
  7. Matthew D. Shapiro & Joel Slemrod, 2003. "Consumer Response to Tax Rebates," American Economic Review, American Economic Association, vol. 93(1), pages 381-396, March.
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