Thursday, December 12, 2013
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New York Fed Examines Use of Payroll Tax Cut
The New York Federal Reserve took a look at the impact of payroll tax cuts on spending, measuring recipients intended use for the funds as well as the actual use. Their findings are below:
New York Fed Examines Use of Payroll Tax Cut
Three of our findings are noteworthy. One, our larger MPC estimates highlight the importance of the design of tax holidays (rebates or cuts) in determining the response of spending to policies. Second, our finding—that people who perceive tax cuts to be more permanent plan to spend more of their funds—has fiscal policy implications as to whether such tax cuts are implemented as long-term extensions or sequential short-term extensions. Third, we find that people spend a large portion of their tax-cut funds to pay off debts—this may be good news considering the large debt issues leading up to and during the financial crisis—and may also suggest that our estimated MPC is an underestimate because by facilitating deleveraging, it can indirectly lead to higher future spending through a reduction in future interest payments.Read the rest of the NY Feds report.