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

FEDS Working Paper No. 2015-037

http://dx.doi.org/10.17016/FEDS.2015.037

35 Pages Posted: 28 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 20, 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.

Keywords: Fiscal stimulus,balance sheets,marginal propensity to consume,payroll tax,survey responses

JEL Classification: E21,E27,E62,C8

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 20, 2015). http://dx.doi.org/10.17016/FEDS.2015.037. Available at SSRN: https://ssrn.com/abstract=2620757 or http://dx.doi.org/10.2139/ssrn.2620757

Claudia Sahm (Contact Author)

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
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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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National Bureau of Economic Research (NBER) ( email )

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Joel B. Slemrod

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

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Ann Arbor, MI 48109-1234
United States
734-936-3914 (Phone)
734-763-4032 (Fax)

National Bureau of Economic Research (NBER)

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