Using tax reductions

Date posted: April 25, 2011

Often during recessions, the government will cut taxes in hopes households will spend funds and revive the economy. But does this happen? N.C. State University economist Mike Walden weighs in with what research shows.

“This is often a tactic that government uses, particularly during recessions. Of course, one of the big problems during the recession is people aren’t spending, so the notion is to give people a tax cut and they will spend it, and that will help revive the economy.

“The most recent example we had of this on which we have data was the tax cut in 2009 for people eligible for Social Security, They received a onetime payment of $250, and we have some data on what people did with that.

“Forty percent of the recipients actually did spend the money. So that goes to this whole notion, again, of cutting taxes and improving spending. So 40 percent actually did spend the money. Thirty-four percent, however, used the money to pay down on debt. And 24 percent actually saved the money.

“So whether you judge that as a success or a failure in terms of generating spending, the largest group did spend 40 percent. But obviously a majority did not spend it. They either paid down debt or saved the money.

“Interestingly the spending percentage did not vary much by the income of the recipients, but more low-income households actually used the funds to pay down on debt rather than to save.”

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