This paper presents new survey evidence on workers’ response to the 2011 payroll tax cuts. While workers intended to spend 10 to 18 percent of their tax-cut income, they reported actually spending 28 to 43 percent of the funds. This is higher than estimates from studies of recent tax cuts, and arguably a consequence of the design of the 2011 tax cuts. The shift to greater consumption than intended is largely unexplained by presentbias or unanticipated shocks, and is likely a consequence of mental accounting. We also use data from a complementary survey to understand the heterogeneous tax-cut response.
There's a bit of conventional wisdom out that it's better for a fiscal stimulus to goose consumption than to be used for savings. You can see why that might be. A recession is essentially a mismatch between people's desire to save and firms' desire to invest, so something that reduces desired savings would seem to help. But at the same time, when you have a recession characterized by extremely large household debt overhang, helping households reduce their debt loads might be equally valuable. So I think it's not entirely clear whether this means the payroll tax holiday was a better-than-expected idea or a worse-than-expected one—or else, possibly, it doesn't matter.
TODAY IN SLATE
More Than Scottish Pride
Scotland’s referendum isn’t about nationalism. It’s about a system that failed, and a new generation looking to take a chance on itself.
iOS 8 Comes Out Today. Do Not Put It on Your iPhone 4S.
Why Greenland’s “Dark Snow” Should Worry You
Three Talented Actresses in Three Terrible New Shows
The Human Need to Find Connections in Everything
It’s the source of creativity and delusions. It can harm us more than it helps us.
Happy Constitution Day!
Too bad it’s almost certainly unconstitutional.