Do Tax Rebates Work?

The conventional wisdom is that the tax rebate signed by President Bush last year failed to stimulate the economy. But there is now pretty good reason to question that wisdom.

The argument that the rebate didn’t work is based on the notion that it didn’t lift consumer spending very much. In the second quarter of 2008, when most of the rebate checks were sent out, consumer spending rose at an inflation-adjusted annual rate of 1.2 percent, not much above the 0.9 percent rise in the first quarter.

Look closer, though, and the argument becomes flimsier.




This is not iron-clad proof. The data on income groups is based on a Federal Reserve survey that isn’t perfect. Even if it were perfect, drawing a precise line between cause and effect would be impossible. Still, the numbers seem fairly persuasive. They have helped to change my mind about how well the tax rebates worked.

That said, a tax rebate may not work so well in 2009. People seem disposed to save more of their money today than they did a year ago. But my guess is that the tax rebates in the current stimulus plan will help spur the economy. Depending how much worse the economy gets, considering additional rebates may even make sense.

Economics of Contempt and Real Time Economics have more on this subject.

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What if we attached a string to tax rebates such that they MUST be spent? For example, give everyone the equivalent of a government “gift card” that can be redeemed at any store, but cannot be deposited? You could even attach a “buy american” benefit to the card – ie it is worth 25% more if you use it to buy products made in the US…

It might smell a bit too much of social engineering, but at least it would ensure that the money goes where we want it to go – back into the economy…

The tax rebate checks are a tiny piece of the puzzle. The inventors of this idea think that saving the economy is all about increasing concumer demand. This is exactly like fighting a forst fire with a garden hose. Easy! Quick! Demonstrates Immediate Action! But, ultimately irrelevant in and of itself.

The focus of the stimulus must be on creating career jobs with sustainable income streams, building small businesses which means funding small businesses and debt reduction within all pieces and parts of society.

Tax answers are so blunt and so delayed and targeted at the wrong problem. In this fiasco there are no simple solutions, no quick fixes. It is time to get back to basics.

Washington, DC

A lesson for the big bailout:

Forget the bill now making its way through Congress. Instead give a bonus (25%, or whatever is necessary to get the desired total) on all Social Security and Veterans benefits, for perhaps one year. Advantages:
1. The money goes out immediately, with next month’s checks. No squabbles about “shovel ready”.
2. Liberals will like it because most of the money goes to people of modest means.
3. Conservatives will like it because the actual spending decisions are made by private individuals, not the government.
4. No opportunities for pork or lobbying.
5. It can be turned off as soon as the economy recovers.

You can look at it this way. May be the top 5% should be given incentive to spend – like tax rebates or tax cuts. Imagine the bottom 95% spends the rebate money on increasing their debt.

Saving? People saving? If others are anyway like me, they–like me–are just paying down the credit cards and college loans. Until personal debt declines, there won’t be a big jump in consumer spending.

Declining to initiate tax rebates will only delay the pay-down of credit bills, and thus delay any resurgence of consumer spending.

And until consumer spending begins to rise, industrial spending will continue to decline, and employment will continue to plummet.

Just that simple.

As Robert Reich pointed out on an NPR broadcast of Marketplace this AM, tax cuts put more money in people’s pockets, BUT… they are likely to spend much of that money on goods produced by China.

The tax rebates may have had a small effect on the 2nd quarter but it DID NOT have any sustainable effect. For those of you who make more than 200,000. family of four, a gallon of milk costing $4.00 is not much of a dent in your bottom line. But, to a person making $20,000. with a family of four it is huge. So my guess is that the poor spent the money necessities that they would have had to save, & budget for months to acquire. Since they didn’t have to save they got it right away. Notice that the spending DID NOT continue. How about this you try living on $20,000 a year. You see what you have to do without, you see what you’re willing to for go so your kids can have milk… You HAVEN”T GOT A CLUE!!! When are the fat cats going to learn that they CAN NOT EXIST without the middle class!

Unbelievable that the majority of adults, including politicians, economists, and journalists, across the political spectrum still confuse temopral correlation with causation!

” Even if it were perfect, drawing a precise line between cause and effect would be impossible”
This sentence offers a glimpse of hope that David Leonhardt gets it – but alas the rest of the comment suggests that it is natural to use temporal correlation as a “proof” of a causal relationship.

The sames applies to all those that claim that the surge in Iraq has worked becuase we see violence decline. Not even the most ardent anti-war liberals noticed the fallacy. (In the south, the brits reduced the troops and violence also went down.)

I cannot stand this endemic of scientific illiteracy and epistemological ignorance in the U.S. any longer.

Millions of American each year take over-the-counter medication against the common cold, and when they feel better after a few days, they think the drugs have worked! the biological truth is that the drugs do nothing to fight the cold virus. They give you the feeling you proactively did something and they raise the revenue of drug companies.

To translate a temporal correlation into a causation one needs some more pieces of information: (1) A mechanisms of causation; (2) Some replication with a negative control (would the increase in spending have occurred if I repeated the measurement 10 more times, with and without rebate? (3) Or better a “dose response”: One varies the size of the tax cut (e.g. in different states) and monitors whether increase consumer spending scales with the amount of the rebate.

This widely unnoticed rampant scientific illiteracy among journalists, right and left, is a disgrace.

What is your definition of “worked”? Sure the stimulus checks served to artificially inflate spending in the US, but was that truly the intent? I understood the point was to thwart significant deterioration in our economy – not prolong the realization of it. As you mentioned in the article, the ensuing quarter experienced dramatic economic decline, only to be surpassed by the rapid acceleration of deterioration in the 4th quarter. I would argue the stimulus checks had zero impact on the overall depth of the recession and only successfully worked in postponing massive economic fallout until the previous administration was merely days away from leaving office.

If you give someone who barely has enough money to feed his family a check, he’s going to spend it. You don’t need an economics degree to figure that out. More than anything, the stimulus checks provided a small, temporary relief for America’s poor, and as such it was a good thing. So, by all means, do it again, but no amount of “stimulus” can make up for the injustices of American society.

As an economic policy tool, a stimulus like this one is not going to change the fact that a the biggest asset bubble in history just burst.


I don’t dispute that tax cuts in the short-term might help a bit, but the point is that there are fundamental problems with infrastructure and new areas such as energy independence and medical record reform that can and SHOULD be financed. It’s time to change the status quo. I actually think this stimulus package doesn’t do enough. Tax cuts in the long term will do nothing and as Obama pointed out, we may have a recurrence a few years down the road of the same economic problems.

Any social policy has multiple effects, and this view of tax rebates as economic stimulus is quite limited. At the end of the day, what do we have with tax rebates? A flat screen TV for the individual and debt for the government. Investment in mass transit or upgraded buildings would yield a capital asset to offset the debt incurred.

Sure, they spent the money on $4 per gallon gas, a special parting treat to Bush’s buddies in the oil biz.

Many people believe that “buy American” is protectionism. However, it is necessary if we want to get the maximum bang for the buck on a stimulus. If the money is spent to buy American or to make payments to American workers, it supports multiple jobs, not just the retailer. For every American worker’s job that worker has income which is spent locally on groceries, gas, haircuts, church charity, etc. The flow of this money within the US creates four more jobs. However, as soon as the money flows out of the US, this job creation effect stops.

It convinces me that the Republicans either are stupid or just represent their wealthy constituents who are making money by off-shoring jobs, when they raise the buy American issue regarding the American steel in Obama’s stimulus plan, saying it is “protectionism”. Doesn’t it also make economic sense to create American steel workers jobs, and doesn’t it make sense not to waste money on transporting steel from places farther away? As long as the supplier is reasonably efficient and honest in pricing, it should make sense to buy it from the nearest manufacturer, especially when that manufacturer is in the US.

The crucial thing is if the list in GDP corresponds to a multiplier > 1. Did the targetting work? If not, the government might as well drop dollar bills from the air.

This has so many holes in it that its disgusting it actually made print.

To use the logic here, if Congress went to Staples tomorrow and bought a trillion dollars worth of pens, then we could shout “recession over!”. Then tomorrow we’d be still stuck with 4 million Americans that can’t afford to feed their families because they are out of a job.

Strength of an economy should be measured on its output, not its intake.

I look at these numbers and say the ’08 tax rebate was a mistake in that an artificial infusion to stimulate spending when the trend was in the other direction gave us a false sense of the overall economy. After a miniscule rise (because of mere chump change in many taxpayers’ pockets) spending went over the cliff when the money was gone. It didn’t take me but a week for mine to be gone and I can’t even tell you where it went – bills probably. The stimulus worked very briefly and inconsequentially. The question is: was it worth it at the time? The truth is this type of tax rebate/stimulus measure should have waited until NOW when most Americans are looking for ways to cut their budgets/spending even when it will hurt us in the long run. In short, the timing was wrong and I don’t see much changing psychologically in the near future; in fact, things will get much worse.

I’m not sure people are really arguing about the short term shock to consumer spending, but rather are arguing the benefits to the long term health of the nation from a financial perspective.

Barb, a family of 4 making $20K per year will qualify for up to $588 per month in food stamps. In addition they wil have free school breakfast and lunch. In additon the children certainly and the adults possibly will qualify for Medicaid-no co pay or deductible. They will have greatly reduced utility payments and possibly section 8 housing. Since they work they will receive a large (several thousand $$) earned income rebate. The “poor” in the USA are not by any definition. Rather, they are the new priveledged and leisure class. Sounds like you have wealth envy and are looking for more socialism.

I keep hearing that using rebate or stimulus payments to pay down debt won’t help the economy. But this is too simplistic. If a person is carrying credit card debt and pays an additional amount, every future interest charge and minimum payment is reduced, leaving more money available every month. Some of this additional money can be used to pay down additional debt and some can be used for additional spending.

Similarly, if people us stimulus payments for savings, that can also free money in subsequent months that might otherwise be used to respond to one-time expenses or maintain an emergency fund.

Money used for savings or debt paydown might not be spent right away, but the effect on household budgets of doing so could be felt the very next month, decreasing pressure to be as thrifty as before.

how about a National Gift Card sent to taxpayers with a TBD amount ………..this could only be used for buying Goods and not just be put in the bank or used to pay off debt thus insuring and an immediate cash infusion into the economy with an ancillary benefit of a Sales Tax windfall for the states

Stepping aside from sheer politics, the stimulus checks gave us a bit of hope, kind of like a rainy day fund we didn’t have to give up daily essentials to save. It gave those of us in tough financial situations a tiny ray of sunshine. I spent mine on groceries, fresh fruits and vegetables I may not have otherwise had. I work 3 jobs, and scrape month to month to make ends meet, I don’t qualify for government assistance for anything. But if I sat on my butt and did nothing I would be eligible for every program they offer, sheerly due to laziness. The stimulus check we have gotten, or a second one wouldn’t (and didnt) save me, or the economy, but it would give those of us (the blue collared working class) who really keep this country going, a reason to hope. One day we will be appreciated for our role, and possibly even get paid our true worth, instead of soley working to make someone else rich, while we barely meet ends.

Here’s a wild idea — Maybe what the economy needs is something other than consumer spending.

Demand is demand. And since all “rebates” and spending are just manifestations of government debt, we should move past the economics of stuff and focus on investment for the future. What do we want America to be like 20 years from now. Will more consumer spending possibly get us there?

The current economic catastrophe is a direct result of the creation of enormous debt, our chief economic product of the past decade. When home mortgages approach rental costs people with living wage jobs will make purchases. The investment in infrastructure will be immensely important to any recovery. Savings will fuel investment. Put the money in the taxpayers hands.

Ok…so a few irresponsible people went and spent their rebate on frivolities instead of saving it for a rainy day (which had already arrived and is still going).

I’m not impressed by whatever effect this had, and I don’t find the prospect of giving irresponsible people more cash to be any kind of solution.