Temporary Income Taxes and Consumer Spending
28 Pages Posted: 4 Jul 2004 Last revised: 12 Oct 2022
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Consumer Response to the Timing of Income: Evidence from a Change in Tax Withholding
-
Household Expenditure and the Income Tax Rebates of 2001
By David Johnson, Jonathan A. Parker, ...
-
Household Expenditure and the Income Tax Rebates of 2001
By David Johnson, Jonathan A. Parker, ...
-
The Reaction of Consumer Spending and Debt to Tax Rebates - Evidence from Consumer Credit Data
By Sumit Agarwal, Chunlin Liu, ...
-
The Reaction of Consumer Spending and Debt to Tax Rebates -- Evidence from Consumer Credit Data
By Sumit Agarwal, Chunlin Liu, ...
-
'3rd of Tha Month': Do Social Security Recipients Smooth Consumption between Checks?
-
Did the 2001 Tax Rebate Stimulate Spending? Evidence from Taxpayer Surveys
-
Is There a Daily Discount Rate? Evidence from the Food Stamp Nutrition Cycle