Objection!

Tyler Cowen posts on the potency of tax rebates as a means of increasing consumption:

Matt Shapiro and Joel Slemrod report:

Many households received income tax rebates in 2001 of $300 or $600. These rebates represented advance payments of the tax cut from the new 10 percent tax bracket. Based on a survey of a representative sample of households, this paper finds that only 22 percent of households receiving the rebate would spent it. Instead, they would either save it or use it to pay off debt. This very low rate of spending represents a striking break with past behavior, which would have suggested a much higher rate of spending. The low spending rate implies that the tax rebate provided a very limited stimulus to aggregate demand.

Tyler titles his post 'tax rebates don't always work', but this is not the point at all - in fact, I would be very surprised if the authors came up with results that were any different.

1. The evidence in the Shapiro and Slemrod paper come from a consumer survey; as any good economist knows, you should count less on what people say and more on what they actually do. That's especially the case when there is a 'right' behaviour: e.g. in surveys of alcohol consumption, heavy drinkers always understate the amount they drink.

2. Even if you don't buy this, people are more likely to save or pay off debt during recessions; 2001 was a particularly weak year for the American economy. So, it should be no surprise that 'This very low rate of spending represents a striking break with past behavior, which would have suggested a much higher rate of spending' - 'past behaviour' took place during the years of plenty.

Of course, this second point does not invalidate the 'tax rebates don't always work' statement; it does, however, call into question the implicit standard by which the effectiveness of the rebate is judged, i.e. how the marginal propensity to consume the rebate compares to the marginal propensity to consume as observed in previous occasions. The real question is how low that MPC is (compared with what the government would do with that money) in the case of rebates during times of weak economic performance, and Tyler fails to present any evidence relating to that.