Did the 2008 Tax Rebates Stimulate Short-Term Growth?

June 10, 2009

In preparing its economic forecast published in September 2008, CBO estimated that 40 percent of the tax rebates issued in the spring and summer under the Economic Stimulus Act of 2008 would be spent within six monthsraising the growth of consumption in the second and third quarters of 2008 by 2.3 percent and 0.2 percent, respectively, and reducing it by 1.0 percent in the fourth quarter, when the distribution of the rebates was expected to end. However, analysts disagree about the economic impact of tax rebates. One study of the 2001 rebates suggests that as much as two-thirds of those rebates was spent within six months. For the 2008 rebates, some analysts have put the figure as low as 10 percent to 20 percentin contrast to CBOs estimate of 40 percent. There is, however, disagreement among analysts about the economic impact of tax rebates. Today CBO released a brief that examines the issue in light of the evidence currently available.

Studies of tax rebates fall into three groups depending on the type of data employed: those based on detailed data about spending by individual households; those based on qualitative answers to surveys in which people were asked what they intended to do or had already done with their rebate check; and those based on national data on income and spending for the country as a whole. By itself, simple observation of aggregate consumption over time may not detect the effect of rebates; no spike in spending corresponds to the spike in income. For that reason, CBO places more confidence in studies of the first two types, which rely on differences in spending by people who benefit from the tax rebates and those who do not.

The figure below illustrates why careful studies, not casual observation, are necessary. It shows a counterfactual path for monthly consumption spending, constructed by subtracting from actual spending CBOs estimate of the effect of the rebates. That estimate (based on an assumption that 40 percent of the rebates was spent) implies that the rebates raised the growth of consumption in the second and third quarters by 2.3 percent and 0.2 percent, respectively, but reduced it by 1.0 percent in the fourth quarter, when the distribution of the rebates ended. However, someone comparing the monthly course of consumption with that of income would be unlikely to detect any effect.

Note: The cumulative area between lines showing consumption with and without the effects of rebates is 40 percent of the area between the lines showing income with and without the rebates. In the figure, it is assumed that the 40 percent of rebates is spent over six months according to this pattern: 15 percentage points in the first month and5 percentage pointsin each subsequent month. On the basis of those assumptions, CBO estimates that the rebates added 2.3 percent (at an annual rate) to the growth of consumption in the second quarter of 2008 and 0.2 percent in the third quarter butbecause of those effectsreduced the growth of consumption by 1.0 percent in the fourth quarter.