The 2008 tax rebate and US household debt

Abstract

ABSTRACTStarting in May 2008, the US government disbursed over $100 billion to households in the form of tax rebates. Embedded in the Economic Stimulus Act of 2008, the rollout was aimed at limiting, or possibly reversing, the negative effects of the recession that was just starting. Substantial research concentrated on capturing the impact of the stimulus on consumption behaviour. Prior research suggests that the tax rebate had a small and/or no positive effect. This raises the question: How did individuals spent their tax rebate? Using data from the Survey of Income and Program Participation 2008 panel wave 1 topical module, the data suggest that more than half of the respondents, who received the rebate, used this one-time windfall to pay off debt. Our findings indicate that this effect is more pronounced among low-income individuals, who chose to service their debt burden instead of increasing immediate consumption. The findings point to a stabilizing effect of the tax rebate programme on the financial sector, suggesting that substantial distributional asymmetries exist concerning tax rebate programmes in an economy where a large share of households are indebted.