The Consumption Effects of ARRA Tax Policies on Liquidity Versus Non-Liquidity Constrained Consumers
Loading...
Links to Files
Permanent Link
Collections
Author/Creator
Author/Creator ORCID
Date
2017-01-01
Type of Work
Department
School of Public Policy
Program
Public Policy
Citation of Original Publication
Rights
This item may be protected under Title 17 of the U.S. Copyright Law. It is made available by UMBC for non-commercial research and education. For permission to publish or reproduce, please see http://aok.lib.umbc.edu/specoll/repro.php or contact Special Collections at speccoll(at)umbc.edu
Access limited to the UMBC community. Item may possibly be obtained via Interlibrary Loan through a local library, pending author/copyright holder's permission.
Access limited to the UMBC community. Item may possibly be obtained via Interlibrary Loan through a local library, pending author/copyright holder's permission.
Subjects
Abstract
In February 2009, Congress enacted and the President executed the American Recovery and Reinvestment Act (ARRA), also known as the "stimulus package." The bill provided 12 major tax provisions intended for individuals, which included provisions expanding the Earned Income Tax Credit (EITC), a tax rebate for retired individuals and disabled individuals (RDTR), and distributing a general tax credit called the Making Work Pay tax credit (MWPTC) (U.S. Internal Revenue Service, 2015). This paper assesses the impacts of these three tax policies, with the main question of interest being whether each of these tax policies had an expansionary impact on consumer expenditures beyond what expenditures would have been otherwise for liquidity constrained versus non-liquidity constrained consumers. This paper also tests tenets of consumption in a two-period model by looking at the effect of using different liquidity constraint definitions and the consumption responses to changes in income. Using the Consumer Expenditure Survey (CES) data from the Bureau of Labor Statistics (BLS), this paper examines the effect of these three tax policies on the monthly changes in total consumption expenditures, nondurable goods expenditures, and durable goods expenditures. There are models built to measure both the short-run and long-run responses from each of these tax policies with the long-run response extending for a two-month lag. Both the short- and long-run response models are measured using the fixed effect ordinary least squares (OLS) and fixed effect two-stage least squares (2SLS) techniques with Hausman tests for exogeneity of the tax policies. Overall, the results suggest that the expansion of the EITC, and the RDTR were ineffective counter-cyclical fiscal policies in both the short- and long-run. When significant, multiplier and marginal-propensity-to-consume (MPC) values were consistently below one. For example, the expansion of the EITC had a maximum long-run multiplier of 0.070 on the monthly change in total spending and of 0.011 on the monthly change in nondurable goods spending. Conversely, the MWPTC was a relatively effective counter-cyclical fiscal policy, when examining the significant results, with a long-run total MPC on the monthly change in total spending of 1.614 to 1.947. Liquidity constrained households receiving the tax policies had negative MPCs compared to non-liquidity constrained households, when the results were significant. For example, the MWPTC caused MPCs on the monthly change in total spending for liquidity constrained households relative to non-liquidity constrained households of negative 0.641 to negative 0.619. Across liquidity constraints, being liquidity constrained caused a negative monthly change in total spending between $1,288 and $1,486, for example. Most of the results across specifications were insignificant suggesting at best minimal support for liquidity constraints and changes in temporary income as important determinants of consumption. Chapter I provides an introduction to the policies and the paper; chapter II highlights the theoretical framework used; chapter III discusses the principal related scholarly literature; chapter IV outlines the major research hypotheses, the data used for the analyses, methodologies, and models to be used for the analyses; chapter V presents the outcomes and discusses their theoretical implications; and chapter VI provides the policy implications of the results and some concluding remarks on the results overall.