Monday, January 27, 2014

Tax refunds and myopia

From anecdotal evidence, it appears that many Americans like to use the refund from their yearly tax filing for various home improvement projects. That seems like a strange habit, but could be explained by its timing (Spring season) and the unexpected nature of this windfall that is large enough to allow some major purchase that would not happen during the rest of the year. For perennially cash-constrained households, being forced to put a little aside for a one-time cash-out is the only way to do some capital purchase. Does this theory make any sense? It does in developing countries where ROSCAs are popular for this reason.

It looks like the same holds for US households. Brian Baugh, Itzhak Ben-David and Hoonsuk Park look at purchase patterns when the tax forms are filed and when the tax refund check arrives. The first finding is that consumption does not move at the filing, even though uncertainty about the refund resolves. In other words, a change in the permanent income here does not matter, presumably because there is some constraint. When the refund check is cashed, though, consumption jumps up and returns to the previous levels within weeks. It looks like households are cash-constrained. But the composition of the purchases indicates that there is a substantial amount of non-durables in the basket, showing also they are rather impatient. In fact very little remains for savings. I would have expected that at least credit card debt would be drawn down. One can thus conclude that their myopia dominates the cash constraint. Sad.

1 comment:

Anonymous said...

Wasn't the result of the analysis of the Bush tax rebates that people used them little for consumption? In which way is the situation different?