Balance-Sheet Households and Fiscal Stimulus: Lessons from the Payroll Tax Cut and its Expiration

34 Pages Posted: 1 Jun 2015 Last revised: 16 Jun 2015

See all articles by Claudia Sahm

Claudia Sahm

Federal Reserve Board

Matthew D. Shapiro

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Joel B. Slemrod

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2015

Abstract

Balance-sheet repair drove the response of a significant fraction of households to fiscal stimulus following the Great Recession. By combining survey, behavioral, and time-series evidence on the 2011 payroll tax cut and its expiration in 2013, this papers identifies and analyzes households who smooth debt repayment. These “balance-sheet households” are as prevalent as “permanent-income households,” who smooth consumption in response to the temporary tax cut, and outnumber “constrained households,” who temporarily boost spending. The asymmetric spending response of balance-sheet households poses challenges to standard models, but nonetheless appears important for understanding individual and aggregate responses to fiscal stimulus.

Suggested Citation

Sahm, Claudia and Shapiro, Matthew D. and Slemrod, Joel B., Balance-Sheet Households and Fiscal Stimulus: Lessons from the Payroll Tax Cut and its Expiration (May 2015). NBER Working Paper No. w21220. Available at SSRN: https://ssrn.com/abstract=2612775

Claudia Sahm (Contact Author)

Federal Reserve Board ( email )

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Matthew D. Shapiro

University of Michigan at Ann Arbor - Department of Economics ( email )

and Survey Research Center
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Joel B. Slemrod

University of Michigan, Stephen M. Ross School of Business ( email )

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