Why recent tax rebates did not work

There used to be a time, not long ago, where tax rebates were popular. The idea was that putting money in people's pockets would drive them to spend it all and by multiplier magic the economy would grow sufficiently to recoup the lost taxes. And it did not work, as the Ricardian Equivalence would state, people mostly saved it all up for the looming tax increases. The only real impact came from those households where the Ricardian Equivalence would not hold, the cash constrained ones.

Thomas Bishop and Cheolbeom Park argue that the latter are a dying breed, and this is why the 2001 tax rebates in the US failed even more than the previous ones. The reason is that the increased availability of credit card lines reduced the number of households that were borrowing constraint, and those holding credit card debt simply applied their tax rebate against the current debt. The only ones who would spend the tax rebate are those who maxed out their credit card and still want to spend more.

All of this is rather obvious, and we all know these theoretical results since the works of Mark Huggett, Rao Aiyagari and Christopher Carroll. But it bears repeating, because people, and especially politicians, keep ignoring this.