US Stimulus Debate Focuses On Tax Rebates

by Mike Godfrey, Tax-News.com, Washington

24 January 2008

President Bush has moved swiftly since proposing new tax breaks last week, attempting to secure agreement with Congressional leaders over the shape of a fiscal stimulus plan, which currently seems to be leaning heavily towards giving individual taxpayers and low income groups a cash boost.

With the guardians of the US economy having acknowledged, in deeds if not in words, that a recession is nearer than at first thought - Tuesday's three-quarters of a point interest rate cut by the Federal Reserve was the largest single cut in 25 years - Bush has wasted no time in sounding out Democratic leaders about new tax cut legislation, and he emerged from meetings on Tuesday optimistic that an agreement between the administration and Congress on the format of these tax cuts was close at hand.

"I left the meeting that I just had in the Cabinet Room with the leadership in the House and the Senate with a very positive feeling," Bush announced.

"All of us understand that we need to work together. All of us understand that we need to do something that will be effective. And all of us understand that now is the time to work together to get a package done," he added.

It is understood that about two-thirds of the fiscal stimulus package, estimated to be worth about USD145 billion, would provide tax breaks for individual income taxpayers, with rebates of as much as USD800 for single taxpayers and USD1,600 for married taxpayers being considered.

The rest of the package would be put towards providing businesses with extra cash to spend on investments, at the centre of which would be a doubling of the amount that small businesses can deduct from taxable income when buying new equipment, to USD250,000. Businesses are also likely to be allowed to depreciate investments faster.

Meanwhile in the Senate, the Finance Committee concluded the first of several planned hearings to explore the most effective economy-boosting fiscal stimulus options, which also examined tax rebates.

Finance Committee Chairman Max Baucus, who called the hearings, suggested that a tax rebate could be made available not only to income tax filers, but to lower-income Americans who may pay significant employment or “payroll” taxes, even though they have no income tax liability.

“What would the effect be if instead of USD800 to USD1600, [a rebate] was USD400 to USD800, but with an additional USD400 bonus given to families for each child? My initial analysis of that is …you get a significant number of dollars to families who are more likely to spend," he surmised.

Responding to Baucus's assertion, Congressional Budget Director Peter Orszag commented that if such a proposal would make benefits available to households with children where the parents do not owe income tax liability, it "would likely have a higher cost-effectiveness” for economic stimulus.

The CBO director also made the observation that, although Americans who did not owe income taxes did not receive rebates in 2001 (in President Bush's first fiscal stimulus package), those with lower incomes who did receive the rebate were more likely to spend the funds.

“If you extrapolate that a bit out to even lower-income households, you can get appreciable effects,” Orszag observed.

However, Bush has received flak from his own side over his apparent haste to jump onto the tax rebate bandwagon in an attempt to get a fiscal stimulus package passed by Congress at the earliest opportunity.

One Republican dissenter, Senator Judd Gregg, the ranking member of the Senate Budget Committee, on Tuesday attempted to wave "the red flag of reason", warning that tax rebates may not necessarily translate into US economic growth because so much consumption is spent on imported items.

"Maybe it stimulates the Chinese economy," Gregg remarked on the Senate floor. "I'm not so sure it stimulates our economy."

He also argued that such a plan would merely pile up budgetary problems for the future.

"This thing is not moving in a fiscally responsible direction," he cautioned, going on to point out that the USD145 billion would have to be "borrowed from our children".

Recommended