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Updated 5:30 PM February 1, 2008
 

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Will tax rebates work?

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

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

"Timing is crucial," says 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 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 write off 50 percent of purchases of plants and other capital equipment immediately, 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," says Shapiro, professor of economics.

Their analysis can be found in the following papers:

www.bus.umich.edu/NewsRoom/WP2001-22.pdf
www.bus.umich.edu/NewsRoom/WP2002-11.pdf.

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