Department of Economics

University of Delaware

Working Paper #2003-15

Laurence Seidman and Kenneth Lewis

ABSTRACT

The purpose of this paper is to reply to Shapiro and Slemrod's recent article in the American Economic Review (March 2003) and address the broader issue: Is a tax rebate an effective tool for combating a recession? We make three points. First, there are serious problems with their consumer surveys. Second, they do not obtain any direct evidence on the marginal propensity to consume (MPC) out of the rebate. Third, even if their survey results were valid, simulations show that a tax rebate twice as large repeated for four quarters would have significantly mitigated the 2001 recession. Thus, their negative conclusion about the effectiveness of counter-cyclical fiscal policy is unwarranted.