Household Expenditure and the Income Tax Rebates of 2001

Johnson, David; Parker, Jonathan A.; Souleles, Nicholas S.

doi:10.2139/ssrn.807866

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Household Expenditure and the Income Tax Rebates of 2001

38 Pages Posted: 3 Jan 2005 Last revised: 4 Jun 2010

See all articles by David Johnson

Jonathan A. Parker

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Nicholas S. Souleles

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

There are 2 versions of this paper

Date Written: August 1, 2005

Abstract

During 2001, most U.S. taxpayers were mailed a Federal tax rebate in a randomly assigned week between July and September. Using special questions added to the Consumer Expenditure Survey, we use this historically unique experiment to measure the change in consumption expenditures caused by receipt of the rebate and to test the Permanent Income Hypothesis and related models. Households spent about 20-40 percent of their rebates on non-durable goods during the three-month period in which they received their rebates, and roughly two-thirds of their rebates cumulatively during the quarter of receipt and subsequent three-month period. The implied effects on aggregate consumption demand are substantial. Responses are larger for households with low liquid wealth or low income, consistent with liquidity constraints.

Keywords: Consumption, saving, Life-Cycle model, Permanent-Income Hypothesis, liquidity constraints; fiscal policy, tax cuts, tax rebates, windfalls

JEL Classification: E21, E62, H31, D91

Suggested Citation: Suggested Citation

Johnson, David S. and Parker, Jonathan A. and Souleles, Nicholas S., Household Expenditure and the Income Tax Rebates of 2001 (August 1, 2005). Available at SSRN: https://ssrn.com/abstract=807866 or http://dx.doi.org/10.2139/ssrn.807866