The Effect of the 2008 Tax Rebates on Consumer Attitudes
Aggarwal, Rishi Stanford
In 2007, the economy showed significant signs of slowing down. In response, Congress and the President signed into law the Economic Stimulus Act of 2008. Part of the Act gave tax rebates to American taxpayers, specifically up to $600 for single individuals making less than $75,000 and up to $1,200 for families jointly making less than $150,000.The effect of tax rebates have been debated over time. Historically, rebates have been distributed to provide economic stimuli in times of recessions. The literature indicates that short-term economic benefits exist for tax rebates but reveals little on the long-term effects of such rebates. One way to test for the long-term effect of tax rebates is to measure consumer attitudes toward the economy. Consumer attitudes include such consumer metrics as consumer confidence and the index of consumer sentiment (ICS). Studies have indicated that there is a link between consumer attitudes toward the economy and economic indicators such as gross national product (GNP).The University of Michigan Survey of Consumers (MSC) computes three indices related to consumer attitudes. These indices include the ICS, the index of current economic conditions (ICC), and the index of consumer expectations (ICE). The Survey includes monthly data on 500 individuals on economic questions related to the formation of these indices. The Survey also collects various demographic data, including age, gender, income, marital status, and education level.In this paper, the effect of the 2008 tax rebates on the MSC indices is tested controlling for various demographic characteristics. The paper uses an ordinary least squares (OLS) regression to measure the effect of the rebates on these three indices controlling for age, gender, marital status, education level, and race. The study will look at two months in particular, December 2007 and August 2008. Since the actual law was not announced until January of 2008, December 2007 serves as the control month for those who did not know about the impending rebates. August 2008 is a month after all rebates were given, and it serves as the test month.The results of this study reveal that tax rebates do not have a statistically significant effect on consumer attitudes. None of the three consumer attitude indices are statistically significant at the 95 percent confidence level. I conclude, therefore, that tax rebates do not have an effect on consumer attitudes, and consequentially, the rebates do not affect the economy via consumer attitudes.
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