A Rose By Any Other Name...

. . .would smell as sweet,” Juliet told Romeo. But the fate of the nation’s economy this year might depend on what we call those $300, $600 or $1,200 checks that some 100 million Americans are due as part of Washington’s plan to stave off recession.

Is the windfall a “tax rebate”? If that’s what officials and the media call it, expect most of the dough to get stashed in bank accounts or to be used to pay down credit card balances, not for new spending. The latter is what Congress and President Bush hope for, since boosting consumer spending, which makes up two-thirds of the economy, may help avoid an economic downturn. But if the money is labeled a “tax bonus,” then it might indeed be used for a few splurges.

The reason is that “decisions about whether checks from the government will be spent or saved depend very heavily on how people’s options are described,” Nicholas Epley, a professor of behavioral science at the University of Chicago business school tells the National Science Foundation, which funds his research. “If the goal is to increase consumer spending, the checks should have been pitched as ‘tax bonuses’ instead of ‘tax rebates.’ People are much more liberal about spending a bonus or a windfall than they are spending money thought of as part of their income. People consider a ‘tax bonus’ a windfall, but consider a ‘tax rebate’ more like their regular income.” They're more likely to put aside a rebate for a rainy day, especially in these uncertain times.

The size of this naming effect can be significant, Epley’s experiments show. He gave volunteers $25 in cash, described it as a rebate to some and a bonus to others. Recipients told they’d gotten a rebate spent $2.43 on items for sale in the lab “store,” while those told it was a bonus spent $11.16. That finding was borne out in the real world of the 2001 tax rebates, when Washington sent people $300 or $600 in an effort to prevent a 9/11-linked recession--and consumer spending hardly budged.

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