What Is the Income Tax Rebate Plan?:
The tax rebate plan is part of the $168 billion economic stimulus bill proposed by President Bush, and approved by the House and Senate. The plan would eliminate taxes on the first $6,000 of taxable income for individuals and the first $12,000 of income for couples. The tax cut would be paid as a rebate check mailed out to taxpayers, in amounts as follows:
- Individuals up to $600.
- Married couples up to $1,200.
- Those with children $300 per dependent child.
In addition, 20 million retirees on Social Security and disabled veterans will get a check for $300 ($600 for couples) if they earned at least $3,000 last year in benefits. However, those on SSI alone will not receive checks. (See SSI and the Tax Rebate Checks)
The package raises loan limits for Fannie Mae, Freddie Mac and the Federal Housing Administration. The plan saves businesses $50 billion by allowing them to deduct an extra 50% off of new equipment purchases, and by increasing expensing for small businesses. (Source: White House, New Growth Package Fact Sheet, January 24, 2008; About the 2008 IRS Tax Rebate Checks; WSJ.com, Congress Approves Economic Stimulus Bill, February 8, 2008)
What Are the Pros of the Income Tax Rebate Plan?:
The economic stimulus is about 1% of GDP, which advocates say is large enough to impact the $13 trillion economy. Most economists agree that tax rebates will immediately lift consumer spending, especially if aimed at low-income families who are more likely to spend it than save it. For example, the 2001 rebate checks increased total consumption by 0.8% in the quarter that the checks were received and 0.6% in the subsequent quarter.
The business tax relief will give companies an incentive to expand this year, thereby creating new jobs.
According to estimates by Economy.com, each rebate dollar spent will generate $1.19 in additional GDP, while reductions in tax rates produced only 59 cents additional GDP per dollar spent. (Source: IHT, Bush calls for $145 billion stimulus package for economy, January 18, 2008)
What Are the Cons of the Tax Rebate Plan?:
By the time the checks arrive in taxpayers' hands, it will be late summer, too late to impact the first half of the year.
Tax rebates may not be the most efficient way to stimulate the economy. The biggest impact is made by increases in unemployment benefits, which produced about $1.73 in demand for every dollar spent, according to the Economy.com study.
Perhaps most importantly, tax cuts that aren't balanced by a decrease in government spending will lead to a larger budget deficit. This will contribute downward pressure on the dollar, which will lead to higher oil prices and inflation. Inflation will hamper the Fed's efforts to lower interest rates later this year, which would be needed if the economy is still sluggish in late 2008 or 2009.
