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

            SeidmanL@Lerner.UDEL.edu     302-831-1917

Kenneth Lewis – Chaplin Tyler Professor of Economics

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