Consumer response to child tax credit
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- Michel, N. & Ahmad, N. Empir Econ (2012) 43: 1199. doi:10.1007/s00181-011-0531-7
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This article uses micro-level data from the Consumer Expenditure Survey (CEX) to study consumers’ spending responses to the child tax credit. The article provides one test of the permanent-income hypothesis (PIH) that infers that temporary changes in income have little effect on consumer spending, at the initiation of the child tax credit in 1997, and a second PIH test when the credit was increased in 2003. The evidence supports the PIH in both 1997 and 2003, even using three different proxies for liquidity-constrained households. Separate from any PIH implications, our findings suggest the child tax credit did not provide a short-term consumption stimulus in either of the time periods studied. Our results therefore cast some doubt on whether this type of tax credit should be considered sound fiscal policy.