Workers' Spending Response to the 2011 Payroll Tax Cuts

Abstract

This paper investigates workers' spending response to the 2011 payroll tax cuts. Respondents were surveyed at the beginning and end of 2011, which allows the comparison of ex ante and ex post reported use of the extra income. While workers on average intended to spend 14 percent of their tax cut income, they ex post reported spending 36 percent of the funds. This pattern of higher spending ex post is shared across all demographic groups. Differences across workers in this shift to greater ex post spending are largely unexplained by differences in either present bias or unanticipated shocks, so in the end the upward revision in spending remains a puzzle. (JEL D12, D91, E21, H24, H31)

What Would You Do With $500? Spending Responses to Gains, Losses, News, and Loans

“…Bunn et al (2017) compare responses to retrospective survey questions (asking how spending adjusted in response to income being higher/lower than had been expected) to those from a survey featuring hypothetical scenarios similar to ours, and find that the sign asymmetry (which we also document) is present in both, although average MPCs are slightly smaller in the hypothetical scenarios. Similarly, for the payroll tax cut, Graziani et al (2016) find that the ex-post reported MPC tends to be somewhat higher than the ex-ante MPC. Beyond consumption responses to income changes, other recent papers, mostly in the context of labor markets, have shown that the reported approach yields preference estimates that are similar to those from revealed choice (Mas and Pallais, 2017), and are predictive of real-world choices (Wiswall and Zafar, 2018).…”

“…9 Whereas the Shapiro-Slemrod instrument asks a qualitative question and hence requires additional assumptions to be informative about the level of MPCs, the Japelli-Pistaferri (JP) instrument directly elicits a quantitative MPC. Similarly, Graziani et al (2016) use a quantitative instrument to elicit consumption responses to the 2011 payroll tax cuts: "Please indicate what share of the extra income [from the payroll tax cut] you are using or plan to use to save or invest, spend or donate, and pay down debts." Christelis et al (2017) use the following question to measure quantitative responses to hypothetical gains in an online survey of Dutch households: "Imagine you unexpectedly receive a one-time bonus from the government equal to the amount of net income your household earns in (one-month / three months).…”

“…A large part of the reported preference literature elicits qualitative spending responses using survey questions that follow Shapiro and Slemrod (2003). More recently, there has been a growing body of work, including ours, that elicit quantitative spending responses (Jappelli and Pistaferri, 2014;Graziani et al, 2016;Christelis et al, 2017). Using strategically-designed survey questions in conjunction with structural models has also been fruitfully applied to other questions related to household financial decisions (Ameriks et al, 2015(Ameriks et al, , 2016.…”

Wealth Shocks and MPC Heterogeneity

“… See Shapiro and Slemrod (1995;2003); Jappelli and Pistaferri (2014);Graziani et al (2016);Christelis et al (2019a);Fuster et al (2018).…”

Reported Effects vs. Revealed-Preference Estimates: Evidence from the propensity to spend tax rebates

“…2 Questions asking respondents to report spending propensities have recently been added to surveys run by the Federal Reserve Bank of New York, the Bank of England, and the Bank of Italy. While large sample survey studies of reported preferences go back to at least Juster and Shay (1964), in addition to papers discussed later, the boom in research is exemplified by Smeeding, Phillips and O'Connor (2000), Coronado, Lupton and Sheiner (2005), Leigh (2012), Crump et al (2015), Graziani, van der Klaauw and Zafar (2016), Auclert (2017), Bunn et al (2017), Kan, Peng and Wang (2017), Ameriks et al (2018), and Fuster, Kaplan and Zafar (2018). to elicit the dollar spending caused by the rebates.…”