The Agenda

Jared Bernstein on Making Work Pay

Ezra Klein finds Jared Bernstein persuasive on how we should understand the impact of the Making Work Pay tax credit on demand. After reading Bernstein’s post, it’s not clear that he has paid scrupulous attention to the survey design used by Claudia Sahm, Matthew Shapiro, and Joel Slemrod. 

Fortunately, my Economics 21 colleagues are here to clear up some of the confusion:

 

The fact that the study focused on survey analysis is not a sufficient reason to discount the results. The authors compare the poor spending rates in response to the 2009 tax cuts as relative to the spending behavior after the 2008 tax cuts. So if households simply under-estimate their spending in response to tax cuts in general; that bias would not suggest that their analysis of withholding versus rebating is invalid.

The survey critique of the study is also not applicable to the other chief result in the paper – that struggling households were less likely to report spending the income from tax cuts. Both struggling families (from a finance perspective) and wealthy ones reported their behavior through surveys, so that cannot explain the difference between the two groups. If wealthier individuals do turn out to be more likely to spend rebated income; a number of Administration policies – such as extending the Bush tax cuts for all but the wealthiest individuals – would have less support.

Sahm, Shapiro, and Slemrod spend a good deal of time explaining the potential pitfalls of the survey method, and how they’ve worked to overcome them in their paper [PDF]. One thing to keep in mind is that the authors made it clear that Making Work Pay did indeed exist. Here is the wording of the key question asked in May and July of 2009:

Under this year’s economic stimulus program, most workers will receive an income tax credit. The tax credit will, in most cases, be four hundred dollars to eight hundred dollars per household this year and next. The tax credit will reduce the amount of taxes withheld from paychecks. As a result, take-home pay may increase as much as sixty-seven dollars per month for married workers or forty-four dollars per month for single workers.Thinking about your (family’s) financial situation this year, will this income tax credit lead you mostly to increase spending, mostly to increase saving, or mostly to pay off debt?

The question assumes that the household in question will receive the tax credit. And it happens that many households, knowing that they were beneficiaries, explained that they would use the money to increase saving or to pay off debt. Other survey questions included whether or not the respondent had heard of the tax credit. Yet this is a different question — the key question was a prospective question about what one would do with the money.

To be sure, this survey could yield inaccurate results re: how the household actually spent the money question. But it’s hard to see how that this approach wouldn’t yield more accurate results than a pre-existing prospective model. 

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