Intuitively, tax credits should have no more of an impact on a household’s consumption profile than anticipated tax cuts, rebates, or increases in expected earnings. Standard microeconomic demand theory assumes that consumption (C = Ca + MPC*Y) is not affected by the source or composition of income. However, Thaler (1999) points out that individuals tend to match the seriousness of the source of unexpected income with its consumption use; more significantly, individuals tend to use income derived from an exogenous source (e.g. child care tax credits) toward the consumption of related goods or services (e.g. childcare or child-related goods). Indeed, Kooreman (1997) shows the presence of “labeling effects” which influence how exogenous income is spent. He studies the spending behavior of Dutch households receiving government child benefit payments and finds empirical evidence indicating that the marginal propensity to consume child clothing out of the benefit payments is significantly larger than the marginal propensity to consume child clothing from other income sources.
Maloy (2000) finds that expansions of the CDCTC increase child-care consumption by low and middle-income taxpayers. Specifically, he finds that a one percent reduction in the after-credit price of childcare increases the amount spent towards childcare by 2.07 percent. However, Maloy states that the reach of the CDCTC is too limited and suggests that a policy of expanding the tax credit and making it refundable, as proposed by Senator Obama, would better satisfy consumption-stimulus goals.
Consumption-targeted tax credits appear to have stronger counter-cyclical properties because labeling effects may induce a greater propensity to consume compared to alternative tax measures such as across-the-board tax cuts or rebates. Policymakers should then favor tax credits or direct welfare payments targeted toward specific domestic expenditures, such as the child benefit payment or tax credit, childcare tax credit, food stamps, or utility benefits, in order to enlarge spending multipliers and stimulate short-run aggregate demand.
Earned Income Tax Credit
While absent from their written economic plans, both Democratic candidates for President have publicly supported increasing the federal Earned Income Tax Credit (EITC), which is currently the largest anti-poverty program in the U.S. While it would be difficult to gauge the economic impact of the EITC nationally, there have been numerous studies that indicate that the EITC has a very profound impact on consumption and output at the local or regional level.
A recent Federal Reserve Bank of Atlanta study (2006) shows that the federal EITC provides over $1.25 billion in economic stimulus in the Nashville Metropolitan area. The estimated multiplier for EITC-recipient expenditures was 1.07, meaning that each EITC dollar spent in the area produced an additional seven cents in economic output, mostly concentrated in the region. The University of Baltimore (2004) estimates that the federal EITC creates over $86 million in economic output in Baltimore City with most of spending occurring in retail, real estate, utilities, and health care. Pollin (2002) estimates that the federal EITC increases retail spending in New Orleans by 2.7%.
It is worth noting that Senator Obama’s economic plan does explicitly provide for a “Making Work Pay” refundable tax credit of up to $500 per person, or $1,000 per working family, which offsets the payroll tax on the first $8,100 of their earnings. This measure benefits a broader range of tax payers, and thus might be a relatively weak counter-cyclical policy following the assumption that lower-income or liquidity-restrained individuals tend to have a higher MPC. Obama’s proposed $35 billion and an additional $35 billion in reserve funds (if the economy continues to deteriorate) for the “Making Work Pay” tax credit might have a greater ‘bang-for-the-buck’ if set aside for an EITC expansion.
Social Security Benefits
Fiscal policies that take advantage of the ‘mailbox effect’ or the ‘small-windfall effect’ can also prove to be effective counter-cyclical policies. Senator Obama’s economic plan also calls for an immediate supplement of $250 to the Social Security Income (SSI) of low- and middle-income seniors. This proposal may be particularly effective for consumption-stimulus because it takes advantage of the mailbox effect-the increased tendency to spend a tangible check-and the small-windfall effect-the demonstrated tendency for small gains in exogenous income to induce a higher MPC than larger gains. And as the Senator’s economic literature notes, seniors tend to have a higher MPC than younger Americans.
Econometric studies indicate that increases in SSI-whether anticipated or unanticipated-has a strong positive effect on consumption. Wilcox (1989) studies the increases in primary insurance benefits in the period between 1965 and 1985 and finds that anticipated increases in benefits caused significant increases in consumption expenditure at the time the benefits where paid; specifically, he estimates that a 10 percent increase in benefits caused a 1.4 percent increase in total retail goods and a 3 percent increase in durable goods with a concentration of spending on automobiles and furniture. Feldstein (1996) finds that each additional dollar of social security wealth increases the annual value of real per capita consumption by 3 to 4 cents.
I'm not an economic guru, but I can't help but consider that waiving payrool tax as it is earned may provide a more sustained economic benefit than a credit that pays back only at tax time.
just sayin'
or his advisors.
http://www.infowars.com/?p=1193
Just what we need, yet more incentives for people to consume rather than save.
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p>Considering that there exists a subclass of people who do little for productivity other than produce more people like themselves, sure, let’s expand the existing poverty programs so recipients get more money quicker so they can spend it faster–all in the name of ‘increased consumption’.
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p>Take the married couple with two kids. Each adult works 20 hours a week at minimum wage. That’s about $14,000 per year gross with existing minimum wage.
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p>No federal tax withholding. If they each go to college, they’ll get a thousand for each kid, or $2000; $4500 for the earned income tax credit, $1000 for Making
NotWork Pay; 1/2 of their child care expenses which probably are paid to the grandmother who’d take care of the kids free otherwise and $8000 for tuition credit.<
p>An expected refund of $15.5K not counting the childcare refund.
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p>Now, whether you think my scenario is fair or not–because that’s NOT where I’m going with this–consider this: Why on earth would that same couple seek full employment when they’re getting $15.5K free money?
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p>It’s the Obama Making Not Working Pay plan!
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Try living for the rest of this year on just 15.5k and you will know why most people are not content with that lifestyle, which is why your scenario is, for the most part, a myth.
I’m just taking the terms of the Obama proposal and applying it to two people with two children, where each person is working part-time at minimum wage.
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p>You saying said people don’t exist? Then, why the Obama proposal? Tell him he promoting the myth.
The myth that those two people, or other people in any significant quantity, intentionally live at or below the poverty line and intentionally do not seek full or better employment.
shows that programs that incentivize work for lower-income groups like EITC increases the amount of hours worked rather than substituting away from work, as you are suggesting.
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p>this is why EITC has generally bi-partisan support.
I’m not disputing that EITC is an efficient welfare program.
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p>I am suggesting that just because it’s an efficient welfare, is not a good reason to increase it in the name of stimulative consumption.
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p>From my example earlier, if I’m earning $14K by working partime and welfare doubles the $14K, there’s no reason whatsoever I should look for something fulltime that pays $28k.
I don't want to be unfair but it's a little out of touch to think that people earning so little will intentionally shun full employment in order to take advantage of tax rebates. You are thinking like a tax accountant and not like a cashier at the 7-11.
When your income is that low, it is not worth being destitute all year for 1 big annual payout. In real life, people do everything in their power to struggle, feed those kids, pay that rent and do the bootstrap thing.
Your conclusion isn’t relevant to my point.
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p>Yes, in real life people do anything to feed kids, pay rent…
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p>My point: If you and your wife have 2 kids and are working and earning mimimum wage in part-time jobs, it’s because that’s the best you can do. Got it.
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p>If you’re earning $15K on those 2 minimum wage salaries and the government is paying you AN ADDITIONAL $15K, what will your response be when someone knocks on your door and offers you a job that pays $30K?
The natural response is to take the job.
Your hypothetical does not factor in human behavior. If you are making 15K, you cannot afford to deliberately keep yourself in that situation just to get a one-time annual payout.
But your hypothetical said these were young parents, both in college, etc, etc. Of course you set those params to figure the max tax credit possible and that's fine. But your hypothetical does not describe people who work min wage part time because it's “the best they can do”. Your hypothetical describes people starting a climb up into the middle class, pursuing higher education, and looking for opportunity.
You think those people will have a disincentive to work?
I don't.
The major cause of Massachusetts’ weak job growth during the 2000s expansion was the capital gains tax hike that Swift allowed and Romney let stand.
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p>You are focused on piddly amounts of consumption — you can’t even make sure that the consumption will happen in state. Jobs come from investment and risk, and the capital gains tax is a tax on risk.
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p>All growth comes from risk.