Consumer Response to the Timing of Income: Evidence from a Change in Tax Withholding

21 Pages Posted: 24 Jan 2007

See all articles by Matthew D. Shapiro

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)

Date Written: April 1993

Abstract

In 1992, the income tax withholding tables were adjusted so that withholding was reduced. A typical worker received an extra $28.80 in take-home pay per month in March through December 1992, to be offset by a lower tax refund in 1993. The change in withholding amounted to 0.5 percent of GDP. President Bush, who proposed this change in his State of the Union address, intended that it provide a temporary stimulus to demand. But the policy change involved only the timing of income, so, under the life-cycle/permanent-income model, it would be predicted to have a negligible effect on consumption and aggregate demand. This paper reports consumers' responses to the change in withholding. The results are based on a survey taken shortly after it went into effect. Forty-three percent of consumers report spending the extra take-home pay--substantially more than the zero percent predicted by the standard models, but substantially less than the one hundred percent upon which the policy was predicated. The decision to save the income is not explained by expected income growth. Therefore, while behavior of many households is not fully consistent with the life-cycle/permanent-income model, liquidity constraints do not appear to account for this behavior.

Suggested Citation

Shapiro, Matthew D. and Slemrod, Joel B., Consumer Response to the Timing of Income: Evidence from a Change in Tax Withholding (April 1993). NBER Working Paper No. w4344. Available at SSRN: https://ssrn.com/abstract=478741

Matthew D. Shapiro (Contact Author)

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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313-764-5419 (Phone)
313-764-2769 (Fax)

Joel B. Slemrod

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

701 Tappan Street
Room R5396
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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Cambridge, MA 02138
United States

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