Department of Economics

A Tax Rebate in A Recession: Is It Safe and Effective?

Department of Economics

University of Delaware

Working Paper #2005-20

A Tax Rebate in A Recession: Is It Safe and Effective?

Kenneth Lewis and Laurence Seidman

ABSTRACT

Is a tax rebate safe and effective?  Simulations with an empirically-tested macro-econometric model are used to estimate the impact of the actual 2001 tax rebate in the U.S. and of a rebate twice as large repeated in three additional quarters, and the results of the simulations are interpreted in light of two important recent empirical studies of the spending of the 2001 rebate by households.  Our simulations show that as long as a tax rebate is temporary and detriggered when the recession ends, its use during a recession does not pose a significant debt or inflation problem.  We find that at the end of one year the larger repeated rebate would have reduced the unemployment rate from 5.9% to at least 5.2%.  Thus, a triggered tax rebate is a safe and effective anti-recession policy.

JEL E62

Key Words: Recession, Fiscal Policy, Tax Rebate

Laurence Seidman – Chaplin Tyler Professor of Economics

Kenneth Lewis – Chaplin Tyler Professor of Economics

LewisK@Lerner.UDEL.edu     302-831-1912

The Lerner College is home to a state-of-the-art financial trading facility, the $1.4 million student-led Blue Hen Investment Fund, a student-managed restaurant and hotel, a high-technology development center of a global bank and a start-up experience for students with new business ideas.

Lerner College faculty - like Anu Sivaraman, who is among Social Media Marketing Magazine’s “Top 100 Marketing Professors on Twitter” and MBAprograms.org’s “Top 50 Marketing Professors on Twitter” - are thought leaders who command attention from influential business audiences, economists and policy makers.

All Lerner College departments offer experience-driven learning and emphasize evidence-based analytics methods to enrich the student experience. Here, finance students visit New York City’s financial districts for a first-hand look at markets trading and to meet with UD alumni.

Charles W. Horn, AS75, and wife Patricia, recently made a $3 million commitment to enhance and expand entrepreneurial studies.

  • Alfred Lerner College of Business & Economics
    303 Alfred Lerner Hall  •  Newark, DE 19716  •  USA  •  ©