Temporary Income Taxes and Consumer Spending

28 Pages Posted: 4 Jul 2004

See all articles by Alan S. Blinder

Alan S. Blinder

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: October 1978

Abstract

Both economic theory and casual empirical observation of the U.S. economy suggest that spending propensities from temporary tax changes are smaller than those from permanent ones, but neither provides much guidance about the magnitude of this difference. This paper offers new empirical estimates of this difference and finds it to he quite substantial. The analysis is based on an amendment of the standard distributed lag version of the permanent in-conic hypothesis that distinguishes temporary taxes from other income on the grounds that the former are "more transitory." This amendment, which is broadly consistent with rational expectations, leads to a nonlinear consumption function. Though the standard error is unavoidably large, the point estimate suggests that a temporary tax change is treated as a 50-50 blend of a normal income tax change and a pure windfall. Over a 1-year planning horizon, a temporary tax change is estimated to have only a little more than half the impact of a permanent tax change of equal magnitude, and a rebate is estimated to have only about 38 percent of the impact.

Suggested Citation

Blinder, Alan S., Temporary Income Taxes and Consumer Spending (October 1978). NBER Working Paper No. w0283. Available at SSRN: https://ssrn.com/abstract=260474

Alan S. Blinder (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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