Matthew Shapiro, Joel Slemrod, University of Michigan rebate study

Rebates Not the Answer to Economic Woes

January 26, 2009 09:02 AM
by Josh Katz
Analysts found that few Americans spent the 2008 tax rebates, and warn that a rebate under the Obama administration won’t boost the economy.

Professors Point to Unhelpful Rebates

Economics professors Matthew Shapiro and Joel Slemrod of the University of Michigan claim that President Barack Obama should not rely on tax rebates in his economic stimulus package, because results of their study indicate that they may not be particularly helpful, the Detroit Free Press reports. 

"Those designing the next economic stimulus package should take into account that much of a temporary tax rebate is likely not to be spent," Shapiro said in a statement, according to The Ann Arbor News. "Instead, tax changes that give a sustained boost to purchasing power of households are more likely to be effective."

The professors used the University of Michigan/Reuters Survey of Consumers to question more than 2,500 Americans on the 2008 federal income tax rebates. Two-thirds of the $152 billion Economic Stimulus Act of 2008 was devoted to the rebates, according to the Free Press.

However, the professors learned that only 20 percent of the households spent most of their rebates, while approximately 48 percent used the rebate to pay debt and about 32 percent saved most of the money. In addition, they say that more Americans will choose to save now than in 2008 because of the worsening economic conditions.

Most of the Americans who spent their money were older, the professors said. They indicated that more than 28 percent of Americans aged 65 and older were more likely to spend the rebates, while 17 percent of those under 65 were likely to do so.

"The rebates in 2008 provided low bang for the buck as an economic stimulus," Shapiro told the Free Press. "Putting cash into the hands of the consumers who use it to save or pay off debt boosts their well-being, but it does not necessarily make them spend."

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Opinion & Analysis: Rebates and economic stimulus

Tax rebates are not the answer, according to the Los Angeles Times. “When Washington has provided rebates in the past, taxpayers have used much of the money to pad savings accounts or reduce debt, neither of which helps the larger economy.” Such tactics will not work until “workers feel secure in their jobs,” the Times says.

“Temporary tax rebates were implemented in 1975, 2001 and 2008, and most economists agree they failed to help the economy,” writes Brian M. Riedl of the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation in The Washington Times. But he argues that different rebates could work. “Long-term marginal tax rate reductions implemented in 1982 and 2003 both substantially increased economic growth. So why are lawmakers planning another round of temporary tax rebates, followed by an increase in tax rates?” he argues.

Bruce Bartlett, a former Treasury Department economist, contends that President Franklin Roosevelt’s government policy of public works during the Great Depression did not help, and only served to lengthen it. Bartlett contends that the U.S. only emerged from the Depression because of World War II spending when “no one worried any more about budget deficits, and the Fed pegged interest rates to ensure that they stayed low, increasing the money supply as necessary to achieve this goal.” Now, Bartlett writes, “Stimulus based on private investment … has the added virtue of establishing a foundation for future growth, whereas consumption spending does not.”

Related: Taiwan looks to shopping vouchers to jump-start economy

Taiwan is giving its citizens shopping vouchers to increase the flow of money through the economy.

Vouchers such as those issued in Taiwan have a dual use: to help consumers and merchants. They have been used in the United States, but for different reasons. After Hurricane Katrina ravaged New Orleans and the U.S. coast of the Gulf of Mexico in 2005, billions were spent on vouchers for housing assistance, repairs and spending money for items to help victims get back on their feet.

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