US Fiscal Stimulus Package Agreed

by Mike Godfrey, Tax-News.com, Washington

28 January 2008

US Treasury Secretary Henry Paulson, joined Speaker Nancy Pelosi and Republican Leader John Boehner on Thursday in announcing a bipartisan agreement on an economic growth package.

The agreement includes around USD150 billion in short-term incentives to bolster business investment and consumer spending, in an attempt to keep the US economy out of recession this year.

The growth plan provides approximately USD100 billion in temporary relief designed to boost the incomes of American taxpayers.

Under the agreement, in 2008, taxes would be cut from 10% to zero percent on the first USD6,000 dollars of taxable income for individual taxpayers, and the first USD12,000 of taxable income for couples. Taxpayers could receive rebates of up to USD600 for individuals and USD1,200 for couples. A minimum of USD300 per person and USD600 per couple would be available to those with at least USD3,000 of earned income. This relief would be available to everyone with adjusted gross income of less than USD75,000 for singles, and USD150,000 for married couples filing jointly. It will be phased out for taxpayers above those income thresholds.

Everyone eligible for this relief would also receive an additional USD300 per child. For example, this would mean up to USD1,800 of tax relief for an eligible couple with two children.

The agreement would also offer incentives to spur on business investment. The agreement would save businesses approximately USD 50 billion in near-term taxes, through a temporary change to the tax code that would allow American businesses that buy new equipment this year to deduct an additional 50% of the cost of their investment in 2008. It is hoped that this will encourage businesses to expand and create new jobs, because buying equipment, software, and tangible property will lower their taxes. The agreement also increases expensing for small businesses.

These temporary measures would take effect immediately, and the administration expects that the effects of the tax cuts would begin to be felt about 60 days after enactment. However, noting that the Internal Revenue Service is already overwhelmed processing 2007 tax returns, Paulson said that the first rebate payments are unlikely to be sent out before May, with most eligible taxpayers receiving their checks by July.

According to the Treasury, the package will not add to the federal deficit, because it is based on broad based tax relief and not federal spending. "The package is not a collection of spending programs – it does not include any government outlays beyond the minimum rebate check and refundable child tax credit," the department explained.

The agreement has been criticised by some senior Democrats for not going far enough, for example by boosting unemployment benefits, while a number of Republicans have called for a more business-orientated package, warning that throwing tax rebates into the economy could be an ineffective and fiscally expensive solution. However, the agreement was praised by President Bush, who has announced his broad satisfaction with the deal.

"I am pleased that this agreement meets the criterion that I set forth last week to provide an effective, robust, and temporary set of incentives that will boost our economy and encourage job creation," he announced at a White House press briefing. "The incentives in this package will lead to higher consumer spending and increased business investment this year. Importantly, this package recognizes that lowering taxes is a powerful and efficient way to help consumers and businesses."

Senate Majority Leader Harry Reid is aiming to have fiscal stimulus legislation sent to the White House for Bush's signature by February 15, but Senate Finance Committee Chairman Max Baucus has indicated that he intends to draft a separate package of measures, independent of House legislation.

Baucus stated that he wants to ensure that all who pay Medicare and Social Security payroll taxes – as well as those who pay income taxes – receive a fair rebate. Baucus also suggested that the Finance bill could include quick stimulus measures such as increases to unemployment insurance and food stamps.

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