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May 03, 2010

What happens with tax rebates?

Whenever tax rebates go to households, there is a debate about what will be done with the money: Will it be spent, or will it be saved? What happened with the most recent tax rebate?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"To put this in context in 2008, it was clear we were in a recession and so one of the things the government did then in the summer actually of 2008 is they said, 'Hey, we are going to give people a tax cut. We are going to rebate some of your income taxes. It is going to be temporary, but we are going to give you some money and we hope you go out and spend it to help the economy.'

"Well, we now have the results in, and we find that actually people overwhelmingly saved those rebates: They saved two-thirds of the rebates; they spent only one-third.

"Economists think this is because of the temporary nature. People understand they are not going to have this money forever, and we are primarily going to put it in the bank or pay down on our credit cards and other bills.

"Also, there is some interesting results based on income. Economists -- economic theory -- would expect that lower-income people would actually spend a higher percentage of their rebates than higher income people. From the results of the 2008 survey, just the opposite was found. Spending rates were actually higher for higher-income households."

Posted by deeshore at May 3, 2010 08:29 AM