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Consumer response to child tax credit

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  • Norbert Michel
  • Nazneen Ahmad

Abstract

This article uses micro-level data from the Consumer Expenditure Survey (CEX) to study consumers’ spending responses to the child tax credit. The article provides one test of the permanent-income hypothesis (PIH) that infers that temporary changes in income have little effect on consumer spending, at the initiation of the child tax credit in 1997, and a second PIH test when the credit was increased in 2003. The evidence supports the PIH in both 1997 and 2003, even using three different proxies for liquidity-constrained households. Separate from any PIH implications, our findings suggest the child tax credit did not provide a short-term consumption stimulus in either of the time periods studied. Our results therefore cast some doubt on whether this type of tax credit should be considered sound fiscal policy. Copyright Springer-Verlag 2012

Suggested Citation

  • Norbert Michel & Nazneen Ahmad, 2012. "Consumer response to child tax credit," Empirical Economics, Springer, vol. 43(3), pages 1199-1214, December.
    • Handle: RePEc:spr:empeco:v:43:y:2012:i:3:p:1199-1214
    DOI: 10.1007/s00181-011-0531-7
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    References listed on IDEAS

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    1. Jaoaqin Alegre & Llorenc Pou, 2008. "Further evidence of excess sensitivity of consumption? Nonseparability among goods and heterogeneity across households," Applied Economics, Taylor & Francis Journals, vol. 40(7), pages 931-948.
    2. Edwards, Ryan D., 2004. "Macroeconomic Implications of the Earned Income Tax Credit," National Tax Journal, National Tax Association;National Tax Journal, vol. 57(1), pages 45-65, March.
    3. Nicholas S. Souleles & Jonathan A. Parker & David S. Johnson, 2006. "Household Expenditure and the Income Tax Rebates of 2001," American Economic Review, American Economic Association, vol. 96(5), pages 1589-1610, December.
    4. Matthew D. Shapiro & Joel Slemrod, 2003. "Consumer Response to Tax Rebates," American Economic Review, American Economic Association, vol. 93(1), pages 381-396, March.
    5. Matthew D. Shapiro & Joel Slemrod, 2003. "Did the 2001 Tax Rebate Stimulate Spending? Evidence from Taxpayer Surveys," NBER Chapters, in: Tax Policy and the Economy, Volume 17, pages 83-110, National Bureau of Economic Research, Inc.
    6. Julia Lynn Coronado & Joseph P. Lupton & Louise Sheiner, 2005. "The household spending response to the 2003 tax cut: evidence from survey data," Finance and Economics Discussion Series 2005-32, Board of Governors of the Federal Reserve System (U.S.).
    7. Lusardi, Annamaria, 1996. "Permanent Income, Current Income, and Consumption: Evidence from Two Panel Data Sets," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 81-90, January.
    8. 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.
    9. Souleles, Nicholas S., 2002. "Consumer response to the Reagan tax cuts," Journal of Public Economics, Elsevier, vol. 85(1), pages 99-120, July.
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    Cited by:

    1. Simpson, Nicole B., 2013. "Families, Taxes and the Welfare System," IZA Discussion Papers 7369, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    Child tax credit; Permanent-income hypothesis; Predictable change in income; Fiscal policy; H31;
    All these keywords.

    JEL classification:

    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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