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Did the payroll tax cut really boost spending?

May 9, 2012: 10:22 AM ET

When Congress passed the payroll tax cut saving workers an average of $1,000 last year, the hope was Americans would go out and spend it, thereby boosting the economy.

But did they?

Workers used most of the extra funds -- about 59% -- to pay down debt or pad their savings. They spent about 41% of the cash, according to a new study by the Federal Reserve Bank of New York.

Workers with higher incomes spent a larger portion of their funds than those with lower incomes. That's contrary to the popular theory that when poorer families are granted a tax cut, they're more likely to go out and spend the extra money.

That notion was true in 2001 and 2008, but why not in 2011? As the Fed researchers explain, when banks tightened lending standards after the crisis, low-income households were cut off  more from credit. They also tend to have higher levels of debt. Therefore, "it should not be surprising," the Fed economists say, that these households were no more likely to spend their tax-cut funds than higher income households.

Meanwhile, men spent more freely than women, and workers over age 60 spent more than those under 60. College graduates spent more than non-college graduates.

Overall, the data show the deleveraging process continues for American households.

"...we find that people spend a large portion of their tax-cut funds to pay off debts—this may be good news considering the large debt issues leading up to and during the financial crisis," the study said.

How did you use your payroll tax cut funds? Tell us in the comments section below.

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About This Author
Annalyn Censky
Annalyn Kurtz
Writer, CNNMoney

Annalyn Kurtz is a senior writer at CNNMoney, where she covers America's jobs crisis, Federal Reserve policy and other economic news. Before joining the site in 2010, she served as a Rotary Ambassadorial Scholar in Prague and interned at Fortune Small Business magazine. @annalynkurtz

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