TAX REBATES HELPED CURE RECESSION
July 12, 2005
Many economists believe that tax rebates are not effective in countering a recession, because households will not spend the money. Therefore, they believe that the Bush tax rebates of 2001 were not effective. However, the National Bureau of Economic Research argues that people did spend their tax rebates and that this helped cure the 2001 recession.
The Bush tax cuts of 2001 included tax rebates of $300 to $600 to American households. Economic theory suggested that most rebate recipients would not spend most of the money. Consequently, the rebates would not help stimulate the economy. However, the NBER discovered that most recipients did spend the money. Using data from the Bureau of Labor statistics and the Consumer Expenditure Survey, the NBER found that:
- The average household spent 20 to 40 percent of its 2001 tax rebate on non-durable goods during the three-month period in which the rebate was received and roughly two-thirds of the rebates were spent over the six-month period following the rebate.
- Household increased their expenditures on food by $51 and their expenditures on non-durable goods by $179 in the quarter of receipt.
- This corresponds to a 2.7 percent rise in expenditures on food and a 3.2 percent rise in non-durable expenditures.
In all, the rebates totaled $38 billion and increased aggregate consumption expenditures on non-durable goods by 2.9 percent and 2.0 percent in the third and fourth quarters of 2001. The timing and magnitude of this stimulus helped counteract the 2001 recession, which ended in the fourth quarter with strong growth in aggregate consumption.
Source: "How Households Responded to Tax Rebates of 2001," NBER Digest, April 2005; based upon: David Johnson, Jonathan Parker and Nicholas Souleles, "Household Expenditure and the Income Tax Rebates of 2001," National Bureau of Economic Research, Working Paper No. 10784, September 2004.
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