Household Expenditure and the Income Tax Rebates of 2001

Abstract:     
During 2001, most U.S. taxpayers were mailed a Federal tax rebate in a randomly assigned week between July and September. Using special questions added to the Consumer Expenditure Survey, we use this historically unique experiment to measure the change in consumption expenditures caused by receipt of the rebate and to test the Permanent Income Hypothesis and related models. Households spent about 20-40 percent of their rebates on non-durable goods during the three-month period in which they received their rebates, and roughly two-thirds of their rebates cumulatively during the quarter of receipt and subsequent three-month period. The implied effects on aggregate consumption demand are substantial. Responses are larger for households with low liquid wealth or low income, consistent with liquidity constraints.

Keywords: Consumption, saving, Life-Cycle model, Permanent-Income Hypothesis, liquidity constraints; fiscal policy, tax cuts, tax rebates, windfalls

JEL Classifications: E21, E62, H31, D91

Working Paper Series