Balance-Sheet Households and Fiscal Stimulus: Lessons from the Payroll Tax Cut and Its Expiration

Sahm, Claudia R.; Shapiro, Matthew D.; Slemrod, Joel B.

Working Paper

Balance-Sheet Households and Fiscal Stimulus: Lessons from the Payroll Tax Cut and Its Expiration

Abstract: Balance-sheet repair drove the response of a significant fraction of households to fiscal stimulus following the Great Recession. By combining survey, behavioral, and time-series evidence on the 2011 payroll tax cut and its expiration in 2013, this papers identifies and analyzes households who smooth debt repayment. These \"balance-sheet households\" are as prevalent as \"permanent-income households,\" who smooth consumption in response to the temporary tax cut, and outnumber \"constrained households,\" who temporarily boost spending. The asymmetric spending response of balance-sheet households poses challenges to standard models, but nonetheless appears important for understanding individual and aggregate responses to fiscal stimulus.

Keywords: Fiscal stimulus; balance sheets; marginal propensity to consume; payroll tax; survey responses;