While politicians in Washington D.C. debate over how to lead the United States out of its current recession, two University professors have their own ideas to add to the discussion.
According Business Prof. Joel Slemrod and Economics Prof. Matthew Shapiro, tax rebates shouldn’t be a significant part of the federal economic stimulus package under consideration in the U.S. Congress.
Though the $825 billion American Recovery Reinvestment Plan, proposed by President Barack Obama and Congressional Democrats includes $275 billion in rebates for taxpayers, Shapiro and Slemrod’s research shows that the plan isn’t likely to have a substantial economic impact.
Research by the two professors on the last year’s $152 billion Economic Stimulus Act — which provided tax rebates for low- and middle-income families and tax incentives for business investment — found that the package didn’t provide the intended economic boost.
“Because of the low spending propensity, the rebates in 2008 provided low ‘bang for the buck’ as economic stimulus,” Shapiro said in a press release. “Putting cash into the hands of the consumers who use it to save or pay off debt boosts their well-being, but it does not necessarily make them spend.”
In a survey of more than 2,500 people, Shapiro and Slemrod found that 80 percent of Americans who received a tax rebate as part of the 2008 Stimulus Act either saved the money or used it pay off existing debt. The remaining 20 percent said they spent at least part of their rebates.
The survey also found that older Americans were the most likely to spend their tax rebates, with 28.5 percent of people over the age of 65 spending their rebate checks, compared to only 11.7 percent of people under the age of 29.
Most individuals who qualified for last year’s Stimulus Act received between $300 and $600. Couples who filed jointly received between $600 and $1,200. Parents with children received an additional $300 per child.
Intended to inject more money into the economy, the percentage of people who actually spent their rebate money was significantly lower than expected when the package was first proposed.
“Putting cash into the hands of the consumers who use it to save or to pay off debt boosts their well being, but it does not necessarily make them spend,” Shapiro said.
Though part of the Obama stimulus plan includes a $500 tax rebate to most working American families, the professors’ research initially concluded that this approach might not be the most effective way to improve the economy. In light of the worsening financial conditions in recent months, Shapiro said a more long-term solution to the economic crisis is necessary.
“Those designing the next economic stimulus package should take into account that much of the temporary tax rebate is likely not to be spent,” Shapiro said. “Instead, tax changes that give a sustained boost to purchasing power of households are more likely to be effective.”
Shapiro and Slemrod published their findings in a report entitled, “Did the 2008 Tax Rebates Stimulate Spending?”
The professors shared their research at an annual meeting of the American Economics Association, which took place earlier this month in San Francisco.