Stimulus Plan Ignites Tax Debate – Rebates Seen as the Next Major Issue

(by Russell Berman, Jan. 25, 2008, NYSun.coM) WASHINGTON – The tentative agreement struck here yesterday by the White House and congressional leaders on a stimulus package sets off a debate on the merit of the proposal’s core element: tax rebates.

If the $150 billion plan passes Congress, government checks of between $300 and $1,200 would go out to virtually all Americans making less than $75,000, a move that proponents argue will boost consumer spending and ignite the slowing economy.

The effectiveness of the package now turns to two key questions: Can the checks be cut in time to avert a recession and will Americans actually spend the money they’re handed?

The hurdles are formidable. Under the deal announced yesterday, House Republican leaders and the Bush administration agreed to scrap their demand that rebates go only to taxpayers, while the Democratic speaker, Rep. Nancy Pelosi, dropped her insistence that unemployment insurance be extended and food stamps be increased.

Those compromises must now meet fast approval in the deliberative Senate, where many Democrats want to add infrastructure spending projects opposed by Republicans and the White House. In a statement, the Senate majority leader, Harry Reid of Nevada, said he expected lawmakers “will work to improve the House package by adding funds for other initiatives that can boost the economy immediately” — an indication that despite the hard-fought accord reached by the House and administration officials, the plan was not likely to escape the upper chamber untouched.

Lawmakers from both parties have seized on the economic stimulus package as an opportunity to show voters they can work together and achieve consensus, so there will be heightened pressure to prevent the accord from rupturing.

The two leading Democratic presidential candidates, senators Clinton and Obama, each put out statements praising the deal struck yesterday, although they also called for extending unemployment insurance benefits and touted their own, more extensive, plans for economic stimulus. John Edwards diverged from his rivals and criticized the plan and its lack of aid for the unemployed as “another example of Washington deserting working people and the middle class.”

Mr. Reid said he hoped to pass legislation before Presidents Day, at which point the Internal Revenue Service could begin sending rebates to an estimated 117 million Americans.

The treasury secretary, Henry Paulson, said the government would work to get checks in the mail “as quickly as we can,” and said he hoped to begin sending rebates by May if the Senate can meet Mr. Reid’s timeline.

“We owe the American people speed, and we owe them a package that’s going to work,” Mr. Paulson said. The secretary acknowledged the IRS would be slowed in processing the rebate checks by the demands of tax filing season in mid-April.

“That’s a very quick turnaround,” the director of the Tax Policy Center at the Brookings Institution, Leonard Burman, said of Mr. Paulson’s timetable, citing estimates that the IRS would not be able to process the rebates until late June at the earliest.

With some economists suggesting that a recession is rapidly approaching and may already be underway, any delay in the bureaucracy could hamper the desired effect of the rebates. “The money’s likely to get in the economy after the economy is already on the mend,” Mr. Burman said.

About two-thirds of the $150 billion package would go toward the rebates, which are targeted toward lower- and middle-income Americans. Individual taxpayers could see up to a $600 check, with couples getting a maximum of $1,200. Families are eligible for an additional $300 for each child. In a concession by Republicans to Democrats seeking more aid for low-income Americans, people who do not pay income taxes but earn at least $3,000 annually will get $300 under the plan.

To keep the total cost within the parameters set by the president last week, the deal excludes wealthier Americans, phasing out the rebate at an annual income of $75,000 for individuals and $150,000 for couples.

About $50 billion in the plan is reserved for temporary tax incentives to encourage immediate spending by businesses. Companies that buy new equipment in 2008 will be able to write off an additional 50% of the cost on their taxes.

President Bush yesterday hailed the agreement as striking the appropriate balance between boosting consumer spending and encouraging business investment to spur job creation. “This package has the right set of policies and is the right size,” Mr. Bush said.

Whether the plan works depends in large measure on how Americans use their rebates. For the economy, the best remedy is if the rebates are spent right away, but tax scholars on the right and left are dubious.

Some studies have shown that people are more likely to spend new income that is permanent, such as a raise in salary, than they are to spend a one-time payment such as a rebate check. “You do something more defensive,” Ryan Ellis, the director of tax policy at Americans for Tax Reform, a conservative advocacy group, said. Many people will therefore put their rebate into a savings account or use it to pay down credit card debt, he said.

Mr. Ellis praised the tax incentives for businesses, saying the ability to write off more money would spur companies to make large purchases, such as new computers, quickly. “It’s one of the best bangs for the buck you can possibly do,” he said.

Coming from a left-leaning economic perspective, Mr. Burman criticized officials for scrapping plans to extend unemployment benefits and increase food stamps in favor of the more “symbolic” rebates. Targeting cash toward people who are the most financially strapped is the surest way of seeing the money injected back into the economy immediately.

“It seems like they’ve ruled out the things that would be most effective,” Mr. Burman said. While the rebates were “not awful,” he said, the plan’s “biggest value is probably psychological,” in that it shows consumers and investors that policymakers in Washington are committed to addressing the nation’s economic woes.

Reprinted here with permission from The New York Sun. Visit the website at NYSun.com.