Did the 2008 Tax Rebates Stimulate Spending?

Of those households receiving the rebate, almost 20 percent reported that they would spend it; nearly 32 percent reported that they would mostly save the rebate, and 48 percent reported that they would mostly pay debt with the rebate.

In an effort to bolster economic performance in light of a looming downturn in economic activity, President George W. Bush signed the Economic Stimulus Act of 2008 on February 13, 2008. More than two-thirds of the $152 billion bill consisted of economic stimulus payments that were sent beginning in May to approximately 130 million households. How well did the program work?

In Did the 2008 Tax Rebates Stimulate Spending? (NBER Working Paper 14753), Matthew Shapiro and Joel Slemrod analyze evidence from a rider on the University of Michigan Survey Research Center's Monthly Survey, also known as the Survey of Consumers, which was included each month from February through June 2008. The rider asked: "Thinking about your (family's) financial situation this year, will the tax rebate lead you mostly to increase spending, mostly to increase saving, or mostly to pay off debt?" Only one-fifth of the survey respondents said that the 2008 tax rebates would lead them to mostly increase spending. Most respondents said they would either mostly save the rebate or mostly use it to pay off debt. The most common plan for the rebate was debt repayment.

These responses imply that the aggregate marginal propensity to spend from the rebate was about one third and that there would not be substantially more spending as a lagged effect of the rebate. Because of the low spending propensity, the rebates in 2008 provided low "bang for the buck" as economic stimulus, Shapiro and Slemrod conclude. Low- income individuals were particularly likely to use the rebate to pay off debt. Shapiro and Slemrod speculate that adverse shocks to housing and other wealth may have focused consumers on rebuilding their balance sheets. The authors note that, given the further decline of wealth since the 2008 rebates were implemented, the impetus to save a windfall might have become even stronger since their survey was conducted.

The 2008 survey asked those who said that they would mostly save the rebate, "Will you use the additional savings to make a purchase later this year, or will you try to keep up your higher savings for at least a year?" A parallel question was asked of those who said that they would mostly pay off debt. Most respondents reported that they would stick to their plans to save or pay off debt.

Even if only one-third of the rebates were spent, the aggregate amounts of the 2008 rebates were large enough that they would have had a noticeable effect on the timing of GDP and consumption growth in the second and third quarters of 2008. Growth in the second quarter was stronger and growth in the third quarter was weaker than they would have been absent the rebate.

For this analysis, Shapiro and Slemrod aggregate the answers to five monthly surveys. Of the 2,518 individuals asked the rebate question, only 61 respondents either answered that they did not know what they planned to do with the rebate or refused to answer, and another 212 respondents said they would not get the rebate. Of those households receiving the rebate, almost 20 percent reported that they would spend it; nearly 32 percent reported that they would mostly save the rebate, and 48 percent reported that they would mostly pay debt with the rebate. Those over age 65 were more than 11 percentage points more likely to report mostly spending the rebate than those younger than 64. Overall there is a clear, increasing relationship between age and spending.

Based on the survey responses, the spending rate is not strongly related to income. Indeed, the point estimate of the spending rate for the lowest-income group is smaller than the average. The survey paints a picture of low-income individuals who use a cash windfall to pay off debt. Of those earning less the $20,000, 58 percent planned to use the rebate to mostly pay off debt. In contrast, 40 percent of those with income greater than $75,000 planned to mostly pay off debt.

The official aggregate data on personal saving are broadly consistent with most of the rebate being saved. After hovering just above zero for the first part of the year, the personal saving rate spiked sharply in May, when the rebate program began, and through July it remained much higher than in previous months.

To extend their analysis, the authors looked back at the impact of the 2001 tax rebates. As part of the ten-year tax cut bill passed by Congress in the spring of 2001, the Treasury mailed tax rebate checks of up to $300 for single individuals and up to $600 for households from late July and through late September 2001. In two papers published in 2003, Shapiro and Slemrod reported the results of a survey about the rebates conducted in August, September, and October 2001. At that time, 22 percent of households reported that the tax rebate would lead them to mostly increase spending. As in the 2008 survey, there was no evidence that the spending rate was higher for low-income households. And, the aggregate data in 2001 show a spike in the saving rate precisely at the same time the tax rebates were mailed in July, August, and September 2001.

Another study of the 2001 tax rebate episode by David Johnson, Jonathan Parker, and Nicholas Souleles (NBER Working Paper No. 10784) used the random timing of the mailing of rebates to identify their effects on behavior. It measured the change in consumption caused by the receipt of the rebate using a special module of questions added to the Consumer Expenditure Survey (CEX). The CEX module asked households when they received the rebate checks and the amount of any rebate. In that work, the estimate of the response of non-durable expenditures in the first quarter after the receipt of the checks is broadly consistent with Shapiro and Slemrod's 2003 results: a marginal propensity to consume of about one-third. What differs is the suggestion that consumption responses persisted into the second, and even third, quarter after the receipt of the checks.

-- Donna Zerwitz