The US government has failed if it believes its one-off tax rebate will perk consumer spending and help revive the American economy, according to a study released on Wednesday.
Behavioural scientists found that people given money as a lump sum are likelier to squirrel it away or pay off debt, but if they are given the same amount spread as smaller, monthly payments, they are more inclined to spend it.
The tax rebates were dished out from April 28 by the US Internal Revenue Service (IRS) under President George W. Bush's plan to stimulate the US economy.
The IRS is issuing payments of up to 600 dollars (1,200 dollars for married couples), plus 300 dollars for eligible children younger than 17.
Writing in a Dutch-based publication, the Journal of Economic Psychology, Valrie Chambers and Marilyn Spencer of Texas A&M University asked 141 students how they would spend the rebate.
The students were given these options in which to allocate some or all of the money: investing; reducing credit-card debt; paying off a mortgage; using the money for regular monthly expenses; buying a "durable asset" such as furniture; and saving for an infrequently yearly expense, such as a holiday.
For rebates of 300 dollars or 600 dollars, the students would save 81 percent of the money on average and spend the remaining 19 percent if they received the windfalls in a single shot.
But if these same sums were paid out in small monthly refunds, the picture was different. On average, 34 percent of the 300 dollars would be saved and 66 spent, while 60 percent of the 600 dollars would be saved and 40 percent spent.
The reason, suggest Chambers and Spencer, is that small payments are harder to track and thus get lost in the sauce of monthly expenditure.
But a large payment is noticeable and thus prompts a conscious decision about how to use it.
This important quirk of psychology is usually overlooked by politicians, they say. In the current economic climate, the instinct is to save, which means that less of the rebate will be spent.
"Traditional policy discussions have not examined potential effects of changing refund frequencies on taxpayer actions," says the paper.
"Given tax rebate history, taxpayers may consider refunds as windfalls, not as permanent income. The amount of the refund, the type of tax change and the timing should be considered to achieve the desired public policy."
This year's US rebates are available to individuals who have income of less than 75,000 dollars a year, or 150,000 dollars for a couple. The stimulus plan is expected to cost 152 billion dollars.
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AFP 101032 GMT 06 08
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