NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Consumer Response to the Timing of Income: Evidence from a Change in Tax Withholding

Matthew D. Shapiro, Joel Slemrod

NBER Working Paper No. 4344 (Also Reprint No. r1967)
Issued in April 1993
NBER Program(s):   PE   EFG

In 1992, the income tax withholding tables were adjusted so that withholding was reduced. A typical worker received an extra $28.80 in take-home pay per month in March through December 1992, to be offset by a lower tax refund in 1993. The change in withholding amounted to 0.5 percent of GDP. President Bush, who proposed this change in his State of the Union address, intended that it provide a temporary stimulus to demand. But the policy change involved only the timing of income, so, under the life-cycle/permanent-income model, it would be predicted to have a negligible effect on consumption and aggregate demand. This paper reports consumers' responses to the change in withholding. The results are based on a survey taken shortly after it went into effect. Forty-three percent of consumers report spending the extra take-home pay--substantially more than the zero percent predicted by the standard models, but substantially less than the one hundred percent upon which the policy was predicated. The decision to save the income is not explained by expected income growth. Therefore, while behavior of many households is not fully consistent with the life-cycle/permanent-income model, liquidity constraints do not appear to account for this behavior.

download in pdf format
   (151 K)

download in djvu format
   (107 K)

email paper

This paper is available as PDF (151 K) or DjVu (107 K) (Download viewer) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w4344

Published: American Economic Review, vol. 85, no. 1, pp. 274-283, (March 1995) citation courtesy of

Users who downloaded this paper also downloaded these:
Shapiro and Slemrod w8672 Consumer Response to Tax Rebates
Shapiro and Slemrod Did the 2001 Tax Rebate Stimulate Spending? Evidence from Taxpayer Surveys
Campbell and Mankiw Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence
Shapiro and Slemrod w14753 Did the 2008 Tax Rebates Stimulate Spending?
Bernheim Ricardian Equivalence: An Evaluation of Theory and Evidence
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us