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Did the 2008 Tax Rebates Stimulate Short-Term Growth 1 (June 2009)

handle is hein.congrec/cbo10353 and id is 1 raw text is: A series ofissue summaries from the Congressional Budget Office JUNE 10, 2009 Did the 2008 Tax Rebates Stimulate Short-Term Growth? In preparing its economic forecast published in Septem- ber 2008, the Congressional Budget Office (CBO) esti- mated that 40 percent of the tax rebates issued in the spring and summer under the Economic Stimulus Act of 2008 (Public Law 110-185) would be spent within six months-raising the growth of consumption in the second and third quarters of 2008 by 2.3 percent and 0.2 percent, respectively, and reducing it by 1.0 percent in the fourth quarter, when the distribution of the rebates was expected to end.1 However, analysts disagree about the economic impact of tax rebates. This brief examines the issue in light of the evidence currently available. Differing Views About the Effectiveness of Tax Rebates Economists are divided about the effectiveness of tax rebates for stimulating short-term growth. Some argue that the temporary nature of rebates leads households to save, not spend, virtually all of the additional income. If so, rebates do not add much to short-term growth. Oth- ers argue, however, that even temporary tax cuts will encourage spending, particularly if they are directed toward low-income households or those with few liquid assets. Such households, those analysts maintain, are more prone to spend any additional income. That disagreement is evident in analyses of the two large federal tax rebates in this decade-the roughly $35 bil- lion in rebates distributed from July through September in 2001 under the Economic Growth and Tax Relief Rec- onciliation Act and the approximately $95 billion in rebates distributed mostly from April to July in 2008 under the Economic Stimulus Act. Some analysts have 1. The figures cited are annual rates. See Congressional Budget Office, The Budget and Economic Outlook: An Update (September 2008). suggested that differences in the characteristics of those two rebates imply different degrees of effectiveness. For example, the 2001 rebates were essentially advance tax refunds resulting from a reduced tax rate for the lowest tax bracket effective for all 2001 liabilities. Because that reduced tax rate was scheduled to last through 2010, the 2001 rebates might have been viewed as less temporary than the 2008 tax rebates; if so, relatively more of the 2001 rebates might have been spent. However, the 2008 rebates were limited to low-income and middle-income groups, whereas the 2001 tax rebates were distributed without regard to income.2 That difference would sug- gest that relatively more of the 2008 tax rebates might have been spent rather than saved. Differences between the economic and budgetary envi- ronments in 2001 and 2008 also might have influenced the relative effectiveness of the rebates. Although both rebates were distributed during recessions, the economic environment at the time of the 2008 rebates was worse, with higher rates of unemployment and lower levels of consumer confidence. Although those worse conditions may suggest that more of the rebates would have been spent because recipients were in greater need, it is also possible that the overall response of consumers was to increase precautionary saving in anticipation of yet harder times ahead. Similarly, the outlook for the federal budget deficit in 2008 was worse than in 2001, and that differ- ence might have resulted in less spending of the rebates by some people who viewed those larger deficits as imply- ing higher future tax burdens. Estimates of the spending effects of tax rebates vary widely. A study of the 2001 rebates suggests that as much 2. The 2008 rebates were also refundable to those without tax liabili- ties, thus providing benefits to low-income groups that the 2001 rebates did not.

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