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The Reaction of Consumer Spending and Debt to Tax Rebates - Evidence from Consumer Credit Data

45 Pages Posted: 12 Dec 2007 Last revised: 13 Dec 2011

Sumit Agarwal

Georgetown University - Department of Finance

Chunlin Liu

University of Nevada, Reno - College of Business

Nicholas S. Souleles

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2007

Abstract

We use a new panel dataset of credit card accounts to analyze how consumers responded to the 2001 Federal income tax rebates. We estimate the monthly response of credit card payments, spending, and debt, exploiting the unique, randomized timing of the rebate disbursement. We find that, on average, consumers initially saved some of the rebate, by increasing their credit card payments and thereby paying down debt. But soon afterwards their spending increased, counter to the canonical Permanent-Income model. Spending rose most for consumers who were initially most likely to be liquidity constrained, whereas debt declined most (so saving rose most) for unconstrained consumers. More generally, the results suggest that there can be important dynamics in consumers' response to lumpy increases in income like tax rebates, working in part through balance sheet (liquidity) mechanisms.

Keywords: consumption, saving, Life-Cycle model, Permanent-Income Hypothesis, liquidity constraints, fiscal policy, tax cuts, tax rebates, windfalls, credit cards, consumer credit, consumer balance sheets, household finance

JEL Classification: D91, E21, E51, E62, G2, H31

Suggested Citation

Agarwal, Sumit and Liu, Chunlin and Souleles, Nicholas S., The Reaction of Consumer Spending and Debt to Tax Rebates - Evidence from Consumer Credit Data (November 1, 2007). Available at SSRN: https://ssrn.com/abstract=1070342 or http://dx.doi.org/10.2139/ssrn.1070342

Sumit Agarwal

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-8207 (Phone)

HOME PAGE: http://www.ushakrisna.com

Chunlin Liu

University of Nevada, Reno - College of Business ( email )

University of Nevada, Reno
Reno, NV 89557-0016
United States

Nicholas S. Souleles (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-9466 (Phone)
215-898-6200 (Fax)

HOME PAGE: http://finance.wharton.upenn.edu/~souleles

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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