Tuesday, January 29, 2008

More Fun With Rebates

The Chron has a stimulus package Q&A that's pretty interesting when it comes to the big question of whether this rebate will do what the feds want us to do: go shopping.

Since I don't think I was paying taxes in 2001 (student + fellow = no money anyway), I'd hadn't remembered the 2001 rebates. They were lower, didn't phase out, and didn't apply to people who paid no taxes that year.

I thought these two questions were the most interesting:

Q: Why are high-income households being excluded?

A: Nadeam Elshami, a spokesman for House Speaker Nancy Pelosi, said that "the president only wanted to give (refunds) to those paying income taxes. We thought it was critical to provide rebates to those families who may not be paying income taxes but who are paying Social Security, Medicare and other taxes."

To provide tax benefits to lower-income people and keep the stimulus package at $150 billion (including $50 billion in business tax credits), "you had to cap (refunds) at the top," Elshami says.

He said lawmakers also believe that lower-income people are more likely to spend their rebates than higher-income people.

Q: How effective are rebates, and are lower-income people more likely to spend them?

A: That's debatable. Two studies of the 2001 rebates produced different results.

University of Michigan economists Matthew Shapiro and Joel Slemrod based their study on a household survey conducted in the fall of 2001. Only 21.8 percent of those surveyed said they planned to spend their refund, 32 percent said they would save it and 46.3 percent said they would use it to pay off debt. A follow-up survey in 2002 yielded similar results.

In both surveys, "there is no indication that low-income households were more likely to spend the rebate - in fact, higher-income households were more likely to say that the tax rebate led them to mostly increase spending," the authors said.

Shapiro said it's hard to say whether the rebates were anti-recessionary because the Sept. 11 terrorist attacks occurred around the time they were going out.

Consumer spending collapsed in September after the attacks but rebounded in October, mainly because automakers started offering zero percent financing.

A separate study by David Johnson, Jonathan Parker and Nicholas Souleles concluded that "the rebates provided a substantial stimulus to the national economy in 2001, helping to end the recession."

Their study, based on the government's Consumer Expenditure Survey, found that households spent 20 to 40 percent of their rebates on nondurable goods during the three-month period in which their rebates arrived, and roughly two-thirds of their rebates cumulatively during this period and the subsequent three-month period.

Their study also found that "low-income households spent a much larger fraction of their rebate during the three-month period of receipt than the typical (middle-income) household." They added that "high-income households also seem to have spent a somewhat greater fraction of the rebate ... although this difference is not statistically significant.


Isn't spending when we should've been saving what's landed us in this mess to begin with? Why is the government encouraging us to just keep on keepin' on?

1 comment:

Catherine H. said...

We do need Americans to spend money right now -- on houses. The government should focus any stimulus efforts on incentivizing home sales. The proposal to secure jumbo loans at conforming loan rates is a great start, and oddly has received very little ink. Note to Uncle Sam: you don't need me to buy an iPhone; you need me to buy a house! So help a sister out, will ya?