A Temporary Tax Rebate in a Recession: Is it Effective and Safe?

Abstract

Is a temporary tax rebate effective and safe as an antirecession policy? Simulations with an empirically tested macroeconometric model are used to estimate the impact of the actual one-time 2001 tax rebate in the United States and of a hypothetical rebate twice as large, injected four times (quarterly). The results of the simulations are interpreted in light of two important recent empirical studies of the spending of the 2001 rebate by households. We estimate that a rebate equal to three percent of quarterly GDP (roughly the size of the 2001 rebate) repeated four times (quarterly) would reduce the unemployment rate at the end of a year by one percentage point (for example, from six percent to five percent). As along as a tax rebate is detriggered when the recession ends, its use during a recession does not pose a significant debt or inflation problem.