The reaction of consumer spending and debt to tax rebates – evidence from consumer credit data

  • We use a new panel dataset of credit card accounts to analyze how consumer responded to the 2001 Federal income tax rebates. We estimate the monthly response of credit card payments, spending, and debt, exploiting the unique, randomized timing of the rebate disbursement. We find that, on average, consumers initially saved some of the rebate, by increasing their credit card payments and thereby paying down debt. But soon afterwards their spending increased, counter to the canonical Permanent-Income model. Spending rose most for consumers who were initially most likely to be liquidity constrained, whereas debt declined most (so saving rose most) for unconstrained consumers. More generally, the results suggest that there can be important dynamics in consumers’ response to “lumpy” increases in income like tax rebates, working in part through balance sheet (liquidity) mechanisms.

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Author:Sumit Agarwal, Chunlin Liu, Nicholas Souleles
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2008,01
Series (Serial Number):CFS working paper series (2008, 01)
Document Type:Working Paper
Year of Completion:2008
Year of first Publication:2008
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2008/01/29
Tag:Consumption; Fiscal Policy; Life-Cycle Model; Liquidity Constraints; Permanent-Income Hypothesis; Saving; Tax Cuts; Tax Rebates; Windfalls
GND Keyword:Konsumentenkredit
Issue:November 2007
Page Number:48
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht