The Reaction of Consumer Spending and Debt to Tax Rebates -- Evidence from Consumer Credit Data
Year: 2007
Type: report
Study design: Observational Study
Abstract: We use a new panel dataset of credit card accounts to analyze how consumers 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.
DOI: 10.3386/w13694
Authors: Sumit Agarwal, Chunlin Liu, Nicholas Souleles
Institutions: Federal Reserve, National Bureau of Economic Research, University of Nevada, Reno, Harvard University, National University of Singapore, Princeton University, Federal Reserve Board of Governors, University of Wisconsin–Milwaukee, Federal Reserve Bank of New York, Federal Reserve Bank of Chicago, University of Pennsylvania, Singapore Management University
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
Funder: University of Pennsylvania
OpenAlex ID: W4241840481