Will Tax Rebates Work?
Congress hopes that by giving money back to taxpayers early, we'll spend it now.
ANN ARBOR, Mich.—American households will receive tax rebates in the next few months, but will they really help America's slumping economy?
Probably not much, says economist Joel Slemrod, director of the University of Michigan Office of Tax Policy Research at the Ross School of Business.
"Timing is crucial," says Slemrod, the Paul W. McCracken Collegiate Professor of Business Economics and Public Policy. "Past experience has shown that the legislative process and operational preparation can take many months before rebates get to taxpayers. More importantly, evidence from the 2001 experience with tax rebates suggests that they may not be as effective as many might hope, because consumers use the rebate checks to save or pay down debt more than they use them to spend."
Previous research by Slemrod and U-M colleague Matthew Shapiro found that only 22 percent of taxpayers spent most of their 2001 rebates¿not enough to stimulate the economy.
In addition to personal tax rebates, tax incentives for business investment—namely, bonus depreciation on capital spending aimed at encouraging investment by allowing businesses to write off costs faster—have had only modest effects on the economy, they say.
"The vast majority of investment did not benefit much," says Shapiro, the Lawrence R. Klein Collegiate Professor of Economics.
Their analysis can be found in the following papers:
Consumer Response to Tax Rebates
Did the 2001 Tax Rebate Stimulate Spending?
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Bernie DeGroat, (734) 936-1015 or 647-1847, email@example.com