Description
Low liquidity and a high marginal propensity to consume are tightly linked. This paper analyzes this link in the context of income tax withholding and refunds. A theory of rational cash management with income uncertainty endogenizes the relationship between illiquidity and the MPC, and can explain the finding that households tend to spend tax refunds as if they valued liquidity, yet do not act to increase liquidity by reducing their withholding. The theory is supported by individual-level evidence based on financial account records, including a positive correlation between the size of tax refunds and the MPC out of those refunds.
Date made available | 2022 |
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Publisher | ICPSR - Interuniversity Consortium for Political and Social Research |
Date of data production | Dec 1 2012 - Jul 1 2016 |
Geographical coverage | USA |