Is a Tax Rebate an Effective Tool for Stabilization Policy?

Charles Steindel and

CS

Charles Steindel Massachusetts Institute of Technology

Franco Modigliani

FM

Franco Modigliani

Discussants: F. Thomas Juster and

FTJ

F. Thomas Juster

Saul H. Hymans

SHH

Saul H. Hymans University of Michigan

IN THE COURSE of the last decade, temporary changes in federal income tax liabilities have become a major tool of macroeconomic policy. The chief episodes so far have been the temporary surcharge of 1968-70 and the tax rebate of 1975. Another rebate was proposed by the Carter administration in early 1977 but was subsequently withdrawn. There has been a lively debate and wide disagreement in the economics profession about the efficacy of short-run changes in personal taxes as a device to stimulate aggregate demand and output. Transitory tax changes are advocated on the grounds that they can provide a prompt and temporary stimulus or restraint to the economy when it is needed and when permanent or longer-acting changes are not desirable because the structure of tax rates is deemed appropriate for the longer run. For a transitory tax change such as an income-tax rebate to accomplish its purpose, it should produce a large response in consumption per dollar of tax revenue lost by the government, and this response should be concentrated in a short time span following the tax reduction.