ANN ARBOR, Mich., Nov. 16 (UPI) -- A University of Michigan study indicates nearly 80 percent of Americans who received federal income tax rebates this year decided to save the money or use it to pay off debts.
In a survey of 1,500 households, U-M economists found only a small number of rebate recipients planned to increase their spending.
"This very low rate of spending represents a striking break with past behavior, which would have suggested a much higher rate of spending," economist Matthew D. Shapiro said Friday. "The low spending rate implies that the tax rebate will provide a very limited stimulus to aggregate demand."
The survey found only 22 percent of Americans said they had already spent their rebates -- or planned to very soon.
By comparison, a 1995 study by Shapiro and Joel Slemrod found 43 percent of American consumers mostly spent extra cash from a 1992 executive order that changed income tax withholding rates to increase after-tax income by about $29 a month.
Among those who said they were hanging onto the money, 59 percent said they would use it to repay debt while 41 percent said they would save it. Among those who said they would spend the rebate, 60 percent planned to use it for day-to-day expenses and 40 percent said they had their eye on a particular item.
Individual taxpayers entitled to the rebate received as much as to $300 and joint filers as much as $600.
"Spending plans for the rebate do not depend on household income," Shapiro said. "In particular, low-income households are not more likely to spend the rebate. This suggests that targeting any additional tax rebate to particular income groups may not improve the effectiveness of a tax cut in stimulating the economy."
The researchers said most households do not expect the whole package of federal tax legislation to have any effect on their personal finances in the next decade and most were equally negative about the prospects of tax cutting to improve short-term economic performance.
"One can speculate about why the spending propensity might have shifted downward under the circumstances of mid-year 2001," Slemrod said. "Perhaps the negative shocks to wealth of the previous two years placed consumers in an asset-building mode and they took advantage of the rebate checks to do that."
