This paper examines the effect of the two tax cuts enacted by President Bush in 2001 and 2003 on consumer spending over time. Our analysis, using macroeconomic variables affecting consumer spending, is based on a sample of 210 time series quarterly data of the U.S. population from 1960 to 2012. The previous studies based on the original consumption model defines consumption depends according to disposable income and autonomous consumption but fail to consider the omitted variables resulting from the negative intercept. This research paper uses an instrumental variable, independent from consumption, incorporated in the different models in order to prevent bias and multicollinearity while analyzing disposable income as a function of consumption. We also study an interaction between disposable income and the tax cuts and we find that the percentage change in consumption derived from the 2001 and 2003 tax policies is not significant. Besides, we control for other variables such as unemployment rate which have significantly affected the level of consumption.
- 2001 tax cut,
- 2003 tax cut,
- instrumental variable,
- interaction term
Available at: http://works.bepress.com/fatoumata_diarrassouba/3/