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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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  • Matthew D. Shapiro

    (University of Michigan)

  • Joel Slemrod

    (University of Michigan)

  • Claudia R Sahm

    (Federal Reserve Board)

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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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 92.

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Date of creation: 2011
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Handle: RePEc:red:sed011:92

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References

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  1. Claudia R. Sahm & Matthew D. Shapiro & Joel B. Slemrod, 2009. "Household Response to the 2008 Tax Rebate: Survey Evidence and Aggregate Implications," NBER Working Papers 15421, National Bureau of Economic Research, Inc.
  2. Souleles, Nicholas S., 2000. "College tuition and household savings and consumption," Journal of Public Economics, Elsevier, Elsevier, vol. 77(2), pages 185-207, August.
  3. Claudia R. Sahm & Matthew D. Shapiro & Joel Slemrod, 2010. "Check in the mail or more in the paycheck: does the effectiveness of fiscal stimulus depend on how it is delivered?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2010-40, Board of Governors of the Federal Reserve System (U.S.).
  4. Nicholas S. Souleles & Jonathan A. Parker & David S. Johnson, 2006. "Household Expenditure and the Income Tax Rebates of 2001," American Economic Review, American Economic Association, American Economic Association, vol. 96(5), pages 1589-1610, December.
  5. Chang-Tai Hsieh, 2003. "Do Consumers React to Anticipated Income Changes? Evidence from the Alaska Permanent Fund," American Economic Review, American Economic Association, American Economic Association, vol. 93(1), pages 397-405, March.
  6. Jonathan A. Parker, 1999. "The Reaction of Household Consumption to Predictable Changes in Social Security Taxes," American Economic Review, American Economic Association, American Economic Association, vol. 89(4), pages 959-973, September.
  7. Souleles, Nicholas S., 2002. "Consumer response to the Reagan tax cuts," Journal of Public Economics, Elsevier, Elsevier, vol. 85(1), pages 99-120, July.
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Cited by:
  1. Matthew D. Shapiro & Joel Slemrod & Claudia R Sahm, 2011. "Check in the Mail or More in the Paycheck: Does the Effectiveness of Fiscal Stimulus Depend on How It Is Delivered?," 2011 Meeting Papers, Society for Economic Dynamics 92, Society for Economic Dynamics.
  2. Damon Jones, 2012. "Inertia and Overwithholding: Explaining the Prevalence of Income Tax Refunds," American Economic Journal: Economic Policy, American Economic Association, American Economic Association, vol. 4(1), pages 158-85, February.
  3. Cwik, Tobias & Wieland, Volker, 2010. "Keynesian government spending multipliers and spillovers in the euro area," Working Paper Series, European Central Bank 1267, European Central Bank.
  4. Justine Hastings & Jesse M. Shapiro, 2012. "Mental Accounting and Consumer Choice: Evidence from Commodity Price Shocks," NBER Working Papers 18248, National Bureau of Economic Research, Inc.
  5. Christopher D. Carroll, 2012. "Implications of Wealth Heterogeneity For Macroeconomics," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 597, The Johns Hopkins University,Department of Economics.
  6. Christina D. Romer & David H. Romer, 2014. "Transfer Payments and the Macroeconomy: The Effects of Social Security Benefit Changes, 1952-1991," NBER Working Papers 20087, National Bureau of Economic Research, Inc.
  7. 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, Federal Reserve Bank of Boston.
  8. 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, Federal Reserve Bank of New York 592, Federal Reserve Bank of New York.
  9. Bernd Hayo & Matthias Uhl, 2014. "Taxation and Consumption: Evidence from a Representative Survey of the German Population," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 201420, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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