Check in the Mail or More in the Paycheck: Does the Effectiveness of Fiscal Stimulus Depend on How it is Delivered?

42 Pages Posted: 6 Mar 2011

See all articles by Claudia Sahm

Claudia Sahm

Independent

Matthew D. Shapiro

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Joel B. Slemrod

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: February 14, 2011

Abstract

Recent fiscal policies have aimed to stimulate household spending. In 2008, most households received one-time economic stimulus payments. In 2009, most working households received the Making Work Pay tax credit in the form of reduced withholding; other households, mainly retirees, received one-time payments. This paper quantifies the spending response to these different policies and examines whether the spending response differed according to whether the stimulus was delivered as a one-time payment or as a flow of payments in the form of reduced withholding. Based on responses from a representative sample of households in the Thomson Reuters/University of Michigan Surveys of Consumers, the paper finds that the reduction in withholding led to a substantially lower rate of spending than the one-time payments. Specifically, 25 percent of households reported that the one-time economic stimulus payment in 2008 led them to mostly increase their spending while only 13 percent reported that the extra pay from the lower withholding in 2009 led them to mostly increase their spending. The paper uses several approaches to isolate the effect of the delivery mechanism from the changing aggregate and individual conditions. Responses to a hypothetical stimulus in 2009, examination of “free responses” concerning differing responses to the policies, and regression analysis controlling for individual economic conditions and demographics all support the primary importance of the income delivery mechanism in determining the spending response to the policies.

Keywords: Fiscal stimulus, tax rebates, marginal propensity to consume, survey responses

JEL Classification: H31, E62, C83

Suggested Citation

Sahm, Claudia and Shapiro, Matthew D. and Slemrod, Joel B., Check in the Mail or More in the Paycheck: Does the Effectiveness of Fiscal Stimulus Depend on How it is Delivered? (February 14, 2011). ECB Working Paper No. 1298, Available at SSRN: https://ssrn.com/abstract=1761528 or http://dx.doi.org/10.2139/ssrn.1761528

Claudia Sahm (Contact Author)

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Matthew D. Shapiro

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Joel B. Slemrod

University of Michigan, Stephen M. Ross School of Business ( email )

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