Economists sometimes argue that tax rebates can spur economic growth. Furthermore, they say that in order to get the biggest bang for the buck, the money should go to those most likely to spend it. According to conventional wisdom, that would be the poor.
Some argue that giving tax dollars to people who haven't actually paid taxes should not be called a tax rebate. Yet even they would agree that lower wealth, lower income individuals are more likely to put this money back into the economy by spending it. Richer people who don't really need the money would probably just end up saving it. That wouldn't do the economy much good in the short term.
Well, now there is a study that turns this conventional wisdom on its head. In "Household Spending Response to the 2008 Tax Rebate," authors Claudia R. Sahm, Matthew D. Shapiro, and Joel B. Slemrod argue that the $96 billion tax rebate resulted in only $32 billion of extra consumer spending. The majority of recipients either saved the extra money or used it to pay down debt.
What is even more startling is that the propensity to spend the money increased as one's age, wealth, and income increased. In other words, of those who were eligible to receive the payments, the ones who were older, wealthier, and had more income were the most likely to put the money back into the economy in the form of consumer spending. This result is completely contrary to the accepted wisdom.
If you are interested, you can get a copy of the paper from the National Bureau of Economic Research.
