Some Advice to the I.R.S. on a Potential Tax Rebate

With hopes high that the stimulus package crafted by House leaders and President Bush will pass through Congress largely unscathed this week, it's now time to think about the next step in the process: How to make sure that consumers spend their rebate instead of saving it.

Sure, American consumers need to save a lot more, but if they pocket the lion's share of the $100 billion in tax rebates expected to be sent to families, that would mean the plan -- giving a short-term boost to spending and spurring economic activity -- would have failed in its intentions.

A bit of history: During the last round of tax rebates in 2001, consumers spent roughly two-thirds of their checks over the nine-months after receiving them. Poorer people were likely to spend a larger part of their checks while the richer socked away more. There was a noticeable uptick in consumer spending after the rebates were sent out, but there's some debate about whether the stimulus package could've been even more effective.

And while the amount saved from the rebates was far from what you could call hoarding, that doesn't mean we shouldn't try to spur consumers to spend more (and perhaps entice them to spend quicker).

How to go about this? Reviewing a number of lab experiments on the spending habits of people who came into some unexpected cash, Nicholas Epley and Ayelet Gneezy of the University of Chicago suggest that it's largely in how these types of "windfalls" are marketed.

Income described as a positive departure from the status quo (e.g., as a bonus) is more readily spent than objectively identical income described as a return to the status quo (e.g., as a rebate).

Epley and Gneezy argue that one effective way of framing any potential rebate as a bonus is to avoid relating it to past earnings.

Looking back at 2001, it's clear that President Bush didn't have this in mind when saying during the unveiling of his stimulus package that the late 90's budget surplus "should be returned to the tax payers who earned it."

The I.R.S. wasn't much help either in its letter informing millions of tax payers of their rebates:

Your [rebate] amount is based on information you submitted on your 2000 federal tax return and is just the first installment of the long-term tax relief provided by the new law. The amount of the check could be reduced by any outstanding federal debt you owe, such as past due child support or federal or state income taxes.

This time around, the President's rhetoric has been toned down, but the rebate is still framed as a return of lost income:

Letting Americans keep more of their own money should increase consumer spending

But maybe the I.R.S. can help out. The title of its 2001 letter was "Notice of Status of Amount of Immediate Tax Relief."

Not bad, but also a little scary. Here's a suggestion for a slightly different approach to this year's letter:

"Congratulations! You're the Recipient of a 2008 Consumption Bonus!"

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