Will tax rebates work? (1/26/2008)

American households will receive tax rebates of up to $1,200 in the next few months, but will they really help America's slumping economy?

Probably not much, says economist Joel Slemrod, director of the University of Michigan Office of Tax Policy Research at the Ross School of Business.

"Timing is crucial," said Slemrod, professor of business economics and public policy. "Past experience has shown that the legislative process and operational preparation can take many months before rebates get to taxpayers. More importantly, evidence from the 2001 experience with tax rebates suggests that they may not be as effective as many might hope, because consumers use the rebate checks to save or pay down debt more than they use them to spend."

Previous research by Slemrod and U-M colleague Matthew Shapiro found that only 22 percent of taxpayers spent most of their 2001 rebates-not enough to stimulate the economy.

In addition to tax rebates for individuals, businesses will be able to immediately write off 50 percent of purchases of plants and other capital equipment, and small businesses can write off additional purchases of equipment.

But such tax incentives for business investment have had only modest effects, they say.

"The vast majority of investment did not benefit much," said Shapiro, professor of economics.

Note: This story has been adapted from a news release issued by the University of Michigan

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