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

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Author Info
Sumit Agarwal
Chunlin Liu
Nicholas S. Souleles

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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 spending increased, counter to the canonical Permanent-Income model. For people whose most intensively used credit card account is in the sample, spending on that account rose by over $200 cumulatively over the nine months after rebate receipt, which represents over 40% of the average household rebate. Because these results relied exclusively on exogenous, randomized variation, they represent compelling evidence of a causal link from the rebate to spending. ; Further, we found significant heterogeneity in the response to the rebate across different types of consumers. Notably, spending rose most for consumers who were initially most likely to be liquidity constrained according to various criteria, for example consumers who appeared to be initially constrained by their credit limits (before making additional payments). By contrast, debt declined most (so saving rose most) for unconstrained consumers. These results suggest that liquidity constraints are important. More generally, we found 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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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-07-10.

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Date of creation: 2007
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Handle: RePEc:fip:fedhwp:wp-07-10

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Keywords: Consumer behavior ; Consumer credit ; Credit cards;

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  1. Economic Logic blog
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 219-34, February. [Downloadable!] (restricted)
  2. Martin Browning & M. Dolores Collado, 2001. "The Response of Expenditures to Anticipated Income Changes: Panel Data Estimates," American Economic Review, American Economic Association, vol. 91(3), pages 681-692, June. [Downloadable!] (restricted)
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  3. Jonathan A. Parker, 1999. "The Reaction of Household Consumption to Predictable Changes in Social Security Taxes," American Economic Review, American Economic Association, vol. 89(4), pages 959-973, September. [Downloadable!] (restricted)
  4. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1992-2), pages 61-156. [Downloadable!]
  5. repec:fth:pennfi:69 is not listed on IDEAS
  6. David W. Wilcox, 1990. "Income tax refunds and the timing of consumption expenditure," Working Paper Series / Economic Activity Section 106, Board of Governors of the Federal Reserve System (U.S.).
  7. Stephens Melvin, 2006. "Paycheque Receipt and the Timing of Consumption," Economic Journal, Royal Economic Society, vol. 116(513), pages 680-701, 07. [Downloadable!] (restricted)
  8. Slemrod, Joel, et al, 1997. "April 15 Syndrome," Economic Inquiry, Oxford University Press, vol. 35(4), pages 695-709, October.
  9. Alan S. Blinder, 1981. "Temporary Income Taxes and Consumer Spending," NBER Working Papers 0283, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Souleles, Nicholas S., 2000. "College tuition and household savings and consumption," Journal of Public Economics, Elsevier, vol. 77(2), pages 185-207, August. [Downloadable!] (restricted)
  11. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Discussion Papers 96-01, University of Copenhagen. Department of Economics.
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  12. Reis, Ricardo, 2006. "Inattentive consumers," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1761-1800, November. [Downloadable!] (restricted)
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  13. Tullio Jappelli & Jörn-Steffen Pischke & Nicholas S. Souleles, 1998. "Testing For Liquidity Constraints In Euler Equations With Complementary Data Sources," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 251-262, May. [Downloadable!] (restricted)
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  14. Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, vol. 89(4), pages 947-958, September. [Downloadable!] (restricted)
  15. Souleles, Nicholas S, 2004. "Expectations, Heterogeneous Forecast Errors, and Consumption: Micro Evidence from the Michigan Consumer Sentiment Surveys," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(1), pages 39-72, February.
  16. Melvin Stephens, 2003. ""3rd of tha Month": Do Social Security Recipients Smooth Consumption Between Checks?," American Economic Review, American Economic Association, vol. 93(1), pages 406-422, March. [Downloadable!]
  17. Wilcox, David W, 1989. "Social Security Benefits, Consumption Expenditure, and the Life Cycle Hypothesis," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 288-304, April. [Downloadable!] (restricted)
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  18. Musto, David K. & Souleles, Nicholas S., 2006. "A portfolio view of consumer credit," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 59-84, January. [Downloadable!] (restricted)
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  19. Souleles, Nicholas S., 2002. "Consumer response to the Reagan tax cuts," Journal of Public Economics, Elsevier, vol. 85(1), pages 99-120, July. [Downloadable!] (restricted)
  20. Chang-Tai Hsieh, 2003. "Do Consumers React to Anticipated Income Changes? Evidence from the Alaska Permanent Fund," American Economic Review, American Economic Association, vol. 93(1), pages 397-405, March. [Downloadable!]
  21. Poterba, James M, 1988. "Are Consumers Forward Looking? Evidence from Fiscal Experiments," American Economic Review, American Economic Association, vol. 78(2), pages 413-18, May. [Downloadable!] (restricted)
  22. Alan J. Auerbach, 2002. "The Bush Tax Cut and National Saving," NBER Working Papers 9012, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. David S. Johnson & Jonathan A. Parker & Nicholas S. Souleles, 2004. "Household Expenditure and the Income Tax Rebates of 2001," NBER Working Papers 10784, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Mark L. Hoekstra & Scott Hankins & Paige Marta Skiba, 2008. "The Ticket to Easy Street? The Financial Consequences of Winning the Lottery," Working Papers 344, University of Pittsburgh, Department of Economics, revised Oct 2009. [Downloadable!]
  3. Daniel Aaronson & Sumit Agarwal & Eric French, 2008. "The consumption response to minimum wage increases," Working Paper Series WP-07-23, Federal Reserve Bank of Chicago. [Downloadable!]
  4. Sumit Agarwal & John C. Driscoll & Xavier Gabaix & David Laibson, 2008. "Learning in the Credit Card Market," NBER Working Papers 13822, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Peter Kuhn & Peter Kooreman & Adriaan R. Soetevent & Arie Kapteyn, 2008. "The Own and Social Effects of an Unexpected Income Shock," Tinbergen Institute Discussion Papers 08-048/1, Tinbergen Institute. [Downloadable!]
  6. Besley, Timothy J. & Meads, Neil & Surico, Paolo, 2008. "Household External Finance and Consumption," CEPR Discussion Papers 6934, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  7. Matthew D. Shapiro & Joel B. Slemrod, 2009. "Did the 2008 Tax Rebates Stimulate Spending?," NBER Working Papers 14753, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Sumit Agarwal & John C. Driscoll & Xavier Gabaix & David Laibson, 2007. "The Age of Reason: Financial Decisions Over the Lifecycle," NBER Working Papers 13191, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  9. Peter Kuhn & Peter Kooreman & Adriaan R. Stoetevent & Arie Kapteyn, 2008. "The Own and Social Effects of an Unexpected Income Shock: Evidence from the Dutch Postcode Lottery," Working Papers 574, RAND Corporation Publications Department. [Downloadable!]
    Other versions:
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