Empirical Economics

, Volume 43, Issue 3, pp 1199–1214 | Cite as

Consumer response to child tax credit



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.


Child tax credit Permanent-income hypothesis Predictable change in income Fiscal policy 

JEL Classification



Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Agarwal S, Chunlin L, Nicholas S (2004) The reaction of consumer spending and debt to tax rebates—evidence from consumer credit data. J Polit Econ 115(6): 986–1019CrossRefGoogle Scholar
  2. Alegre J, Pou L (2008) Further evidence of excess sensitivity of consumption? nonseparability among goods and heterogeneity across households. Appl Econ 40(7): 931–948CrossRefGoogle Scholar
  3. Barrow L, McGranahan L (2001) The earned income tax credit and its impact on America’s families. In: Mayer , Holtz-Eakin (eds) Making work pay. Russell Sage Foundation, New York, pp 329–365Google Scholar
  4. Coronado J, Lupton J, Sheiner L (2005) The household spending response to the 2003 tax cut: evidence from survey data. Finance and economics discussion series divisions of research and statistics and monetary affairs. Federal Reserve Board, WashingtonGoogle Scholar
  5. Drobny A, Speight A (1986) Consumption and income: some simple exercises with panel data. Appl Econ 18(7): 757–775CrossRefGoogle Scholar
  6. Edwards R (2004) Macroeconomic implications of the earned income tax credit. Natl Tax J 57(1): 45–65Google Scholar
  7. Ferrara P (2011) Reaganomics Vs. Obamanomics: fallacies offered by the left. forbes. http://www.forbes.com/sites/peterferrara/2011/05/12/reaganomics-vs-obamanomics-fallacies-offered-by-the-left/. Accessed 25 Aug 2011
  8. Johnson D, Jonathan P, Nicholas S (2006) Household expenditure and the income tax rebates of 2001. Am Econ Rev 96(5): 1589–1610CrossRefGoogle Scholar
  9. Johnson D, Parker J, Nicholas S (2009) The response of consumer spending to rebates during an expansion: evidence from the 2003 child tax credit. Working paperGoogle Scholar
  10. Lusardi A (1996) Permanent income, current income, and consumption: evidence from two panel data sets. J Bus Econ Stat 14(1): 81–90Google Scholar
  11. Michel N (2010) Another look at the spending response to the 2001 income tax rebates. Appl Econ. doi:10.1080/00036840903427224
  12. Mitchell D (2006) A supply-side success story. Copenhagen Institute. http://www.coin.dk/default.asp?aid=695. Accessed 25 Aug 2011
  13. Parker J (1999) The reaction of household consumption to predictable changes in social security taxes. Am Econ Rev 89(4): 959–973CrossRefGoogle Scholar
  14. Shapiro M, Slemrod J (2003) Consumer response to tax rebates. Am Econ Rev 93(1): 381–396CrossRefGoogle Scholar
  15. Shapiro M, Slemrod J (2002) Did the 2001 tax rebate stimulate spending? Evidence from taxpayer surveys. NBER working paper no. 9308. National Bureau of Economic Research, Inc., CambridgeGoogle Scholar
  16. Souleles N (2002) Consumer response to the reagan tax cuts. J Public Econ 85(1): 99–120CrossRefGoogle Scholar

Copyright information

© Springer-Verlag 2011

Authors and Affiliations

  1. 1.Department of Economics and FinanceNicholls State UniversityThibodauxUSA
  2. 2.Department of EconomicsWeber State UniversityOgdenUSA

Personalised recommendations