Asymmetric Responses to Tax-Induced Changes in Personal Income: The 2013 Payroll Tax Hike versus Anticipated 2012 Tax Refunds
As part of the Boston Earned Income Tax Credit Coalition's free tax preparation service offered at the Boston Roxbury Resource Center between January and April 2013, 945 low-to-moderate income individuals were asked about payroll tax changes, financial planning, and their personal characteristics. Using these survey responses, the authors calculated how these individuals planned to respond to the payroll tax hike and their tax refund. The results show that their marginal propensity to consume (MPC) out of the tax refund is 30 percentage points lower than their spending reaction to the tax hike. Specifically, for every dollar less of income due to the payroll tax increase, consumption declines by 90 cents, while for each additional dollar of income from a tax refund, consumption increases by 60 cents. This asymmetric response is persistent across race, gender, and proxies of financial constraints such as credit scores, credit utilization, and so on. The lack of observable explanations for individuals' asymmetric behavior could be the result of the tax changes themselves being different in terms of their timing and method of delivery.