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A boost in the paycheck: survey evidence on workers’ response to the 2011 payroll tax cuts

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  • Grant Graziani
  • Wilbert van der Klaauw
  • Basit Zafar

Abstract

This paper presents new survey evidence on workers’ response to the 2011 payroll tax cuts. While workers intended to spend 10 to 18 percent of their tax-cut income, they reported actually spending 28 to 43 percent of the funds. This is higher than estimates from studies of recent tax cuts, and arguably a consequence of the design of the 2011 tax cuts. The shift to greater consumption than intended is largely unexplained by present-bias or unanticipated shocks, and is likely a consequence of mental accounting. We also use data from a complementary survey to understand the heterogeneous tax-cut response.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 592.

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Date of creation: 2013
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Handle: RePEc:fip:fednsr:592

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Keywords: Wages ; Income tax ; Consumption (Economics) ; Consumer behavior;

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References

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  1. Sumit Agarwal & Chunlin Liu & Nicholas Souleles, 2007. "The reaction of consumer spending and debt to tax rebates; evidence from consumer credit data," Working Papers 07-34, Federal Reserve Bank of Philadelphia.
  2. Sahm, Claudia R. & Shapiro, Matthew D. & Slemrod, Joel, 2011. "Check in the mail or more in the paycheck: does the effectiveness of fiscal stimulus depend on how it is delivered?," Working Paper Series 1298, European Central Bank.
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  7. Jonathan A. Parker & Nicholas S. Souleles & David S. Johnson & Robert McClelland, 2013. "Consumer Spending and the Economic Stimulus Payments of 2008," American Economic Review, American Economic Association, vol. 103(6), pages 2530-53, October.
  8. Annamaria Lusardi & Olivia S. Mitchell, 2009. "How Ordinary Consumers Make Complex Economic Decisions: Financial Literacy and Retirement Readiness," NBER Working Papers 15350, National Bureau of Economic Research, Inc.
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  11. Claudia R. Sahm & Matthew D. Shapiro & Joel Slemrod, 2009. "Household response to the 2008 tax rebates: survey evidence and aggregate implications," Finance and Economics Discussion Series 2009-45, Board of Governors of the Federal Reserve System (U.S.).
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  13. Souleles, Nicholas S., 2002. "Consumer response to the Reagan tax cuts," Journal of Public Economics, Elsevier, vol. 85(1), pages 99-120, July.
  14. Donghoon Lee & Wilbert van der Klaauw, 2010. "An introduction to the FRBNY Consumer Credit Panel," Staff Reports 479, Federal Reserve Bank of New York.
  15. Olivier Armantier & W�ndi Bruine de Bruin & Simon Potter & Giorgio Topa & Wilbert van der Klaauw & Basit Zafar, 2013. "Measuring Inflation Expectations," Annual Review of Economics, Annual Reviews, vol. 5(1), pages 273-301, 05.
  16. Stefano DellaVigna, 2007. "Psychology and Economics: Evidence from the Field," NBER Working Papers 13420, National Bureau of Economic Research, Inc.
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  18. Rajashri Chakrabarti & Donghoon Lee & Wilbert van der Klaauw & Basit Zafar, 2013. "Household Debt and Saving during the 2007 Recession," NBER Chapters, in: Measuring Wealth and Financial Intermediation and Their Links to the Real Economy National Bureau of Economic Research, Inc.
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Cited by:
  1. Bracha, Anat & Cooper, Daniel, 2013. "Asymmetric responses to tax-induced changes in personal income: the 2013 payroll tax hike versus anticipated 2012 tax refunds," Public Policy Brief, Federal Reserve Bank of Boston.

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