50 Pages Posted: 10 Jan 2013
Date Written: January 1, 2013
This paper presents new survey evidence on workers’ response to the 2011 payroll tax cuts. While workers intended to spend 10 to 18 percent of their tax-cut income, they reported actually spending 28 to 43 percent of the funds. This is higher than estimates from studies of recent tax cuts, and arguably a consequence of the design of the 2011 tax cuts. The shift to greater consumption than intended is largely unexplained by present-bias or unanticipated shocks, and is likely a consequence of mental accounting. We also use data from a complementary survey to understand the heterogeneous tax-cut response.
Keywords: tax cuts, consumption, liquidity constraints, mental accounts, permanent-income hypothesis, present-bias
JEL Classification: C83, D91, E21, E62, E65
Suggested Citation: Suggested Citation
Graziani, Grant and van der Klaauw, Wilbert and Zafar, Basit, A Boost in the Paycheck: Survey Evidence on Workers’ Response to the 2011 Payroll Tax Cuts (January 1, 2013). FRB of New York Staff Report No. 592. Available at SSRN: https://ssrn.com/abstract=2197793 or http://dx.doi.org/10.2139/ssrn.2197793