tax

Is tax 'rebate' doomed to fail?

Next month, the U.S. Treasury begins distributing economic stimulus tax rebates to more than 130 million households. The hope is that Americans will spend their checks immediately to bolster the economy.

But does the government's decision to refer to the checks as a "rebate" actually encourage people to save the cash rather than spend it?

A June 2006 behavioral study, " Bonus or Rebate? The Impact of Income Framing on Spending and Saving," found that characterizing -- or "framing" -- the payment as a "rebate" instead of a "bonus" or "windfall" makes people more likely to save the money instead of spending it and giving the economy a short-term boost.

Nicholas Epley says that's exactly what happened after President Bush signed 2001 tax rebate legislation.

Epley is a professor of behavioral science at the University of Chicago Graduate School of Business. He conducted the behavioral study with colleagues Dennis Mak and Lorraine Chen Idson of Harvard University in Cambridge, Mass. The National Science Foundation funded the study.

Follow-up studies after the 2001 rebate showed that only 28 percent of taxpayers surveyed nationally said they spent most of their $300 refund ($600 for joint filers) shortly after receiving it.

For this year's rebate, the government has doubled the cash back, sending out checks up to $600 ($1,200 for joint filers) to taxpayers as part of a $168 billion economic stimulus package. This represents about 1 percent of America's gross domestic product. (Some taxpayers with children will receive an even higher rebate.)

Nonetheless, Epley expects that people will repeat their 2001 behavior and again hold on to much of their rebates, softening any potential boost to the economy.

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"If the economic stimulus package is intended to get people to spend and increase consumption, pitching the tax rebate in this way is not going to lead people to spend it at as high a rate as they might like," says Epley. "We don't know by how much, but the data from our experiment suggest that it might be quite substantial."

Money back vs. found money
First, a note from Webster: A "rebate" is a return of an amount paid, whereas a "bonus" is an extra payment over and above regular remuneration.

Psychologically, a rebate describes a return to a previous wealth state, while a bonus describes a monetary change for the better.

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