DP8306 Heterogeneous Responses and Aggregate Impact of the 2001 Income Tax Rebates

Author(s): Kanishka Misra, Paolo Surico
Publication Date: April 2011
Keyword(s): fiscal policy, heterogeneity, propensity to consume
JEL(s): D91, E21, E62, H31
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8306

This paper estimates the heterogeneous responses to the 2001 income tax rebates across endogenously determined groups of American households. Around 45% of the sample saved the entire value of the rebate. Another 20%, with low income and liquid wealth, spent a significant amount. The largest propensity to consume, however, was associated with the remaining 35% of households, with higher income or liquid wealth. The estimated heterogeneity implies that the tax rebates added a 3.27% to aggregate non-durable consumption expenditure in the second half of 2001. The estimates of the homogeneous response model, in contrast, predict a 5.05% increase.