January 14, 2013
Workers Spent 28%-43% of 2011 Payroll Tax Cut
Grant Graziani (National Bureau of Economic Research), Wilbert Van der Klaauw (University of North Carolina, Department of Economics) & Basit Zafar (Federal Reserve Bank of New York), A Boost in the Paycheck: Survey Evidence on Workers’ Response to the 2011 Payroll Tax Cuts:
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 present-bias 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.
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