Policy Research

Balance Sheet Households and Fiscal Stimulus: Lessons from the Payroll Tax Cut and its Expiration

Claudia Sahm, Matthew Shapiro, Joel Slemrod

Summary

The article examines the effects on household spending habits after the implementation and removal of the 2011-2013 payroll tax cuts. The article finds that during recessionary times, a decrease in payroll tax results in most households using the tax cut to pay off debt as opposed to increasing spending. It also finds that, contrary to normal economic theory, when the tax cut is eventually removed, spending continues to decrease for roughly 1/3 of households.

Read Now

Policy Implications

This article can be used in conjunction with stimulus planning and implementation. It is commonly believed that an across the board tax cut will increase spending and stimulate the economy, however this article suggests that exploring different options may be of value, or at the very least to consider households that may react to stimulus tax cuts by reducing spending. This effect is seen even stronger when tax cuts are removed.