The Effectiveness of Fiscal Stimulus Depends on How It Is Delivered
The  reduction in withholding led to a substantially lower rate of spending than the one-time payments [of 2008].
To stimulate the U.S. economy in 2001, households were sent a tax rebate (paper) check. In 2008, households also received economic stimulus payments in the form of a paper check or electronic funds transfer. But in 2009, working households instead got a reduction in income tax withholding corresponding to a tax credit, while retiree households received a one-time payment.
In Check in the Mail or More in the Paycheck: Does the Effectiveness of Fiscal Stimulus Depend on How It Is Delivered? (NBER Working Paper No. 16246), authors Claudia Sahm, Matthew Shapiro, and Joel Slemrod find that the reduction in withholding led to a substantially lower rate of spending than the one-time payments. Specifically, 25 percent of households reported that the one-time economic stimulus payment in 2008 led them to "mostly increase their spending." Only 13 percent of households reported that the extra pay from the lower withholding in 2009 led them to mostly increase their spending.
Household economic conditions and other features of the stimulus program, such as its per-household size, also play a role in the spend/save decision, and therefore in the effectiveness of the fiscal stimulus. However, their effect is considerably smaller than the effect of the delivery mechanism, the authors find.
They observe that some households viewed the 2008 tax rebates as large enough boosts in their income to induce them to make a large purchase, such as a vacation or a car repair. In contrast, households received the 2009 tax credit as a small but repeated boost to their paychecks, so it may have been less likely to trigger a large purchase. Or, it may simply be harder for people to remember and report the extra small expenses that the tax credit induced.
The data for this study come from answers to the Thomson Reuters/University of Michigan Surveys of Consumers regarding the spending response of households to the fiscal stimulus measures in 2008 and 2009.
-- Lester Picker