January 18, 2008

Economic Benefits of Fiscal Stimulus Likely to Be Small

by William Ahern

President Bush's 2001 tax rebate eventually got mostly good reviews, even grudging praise from the Washington Post editorial board. And so it would be unsurprising if, as media reports suggest, the president now proposed that a new fiscal stimulus be administered the same way: by cutting the lowest income tax rate for the current year, then pre-paying the tax savings.

[The Tax Foundation has historically been critical of fiscal stimulus plans and retroactive tax changes. Here's our critique of Bush's 2001 tax "prebate", and here's our recent warning that stimulus now will distract the nation from needed long-term reforms.]

In May 2001, the first Bush tax cut was enacted with a fiscal stimulus built in. The lowest income tax rate, then 15%, was cut to 10% retroactively to January 2001. Then instead of waiting for taxpayers to file their 2001 tax returns at the beginning of 2002, the Treasury Department mailed out checks for the difference (5% of $6,000 for individuals equaled a $300 rebate; and 5% of $12,000 equaled a $600 rebate).

Gerald Prante has worked out the arithmetic for 2008, which comes to about $800 for individuals and $1,600 for couples. But this similar implementation won't translate into similarly good reviews for at least three reasons:

• One reason is timing. The 2001 stimulus was enacted before 9/11 but paid out afterward in the fall, just before Christmas, when the IRS had time to administer it and when almost everyone agreed that the stimulus's timing was fortuitous. The 2008 stimulus is undoubtedly dreaded at the IRS, and the checks will seemingly arrive at the same time as regular tax refunds.
• Secondly, unlike 2001, 2008 is an election year. Anything Bush does will become the ammunition of the day, and that will spoil the psychological effect of the boost.
• Third is the nonpayer problem. In 2001 there were only about 30 million tax returns filed by people who owed nothing and got back every dollar withheld. Now there are 44 million non-payers thanks to the Bush tax cuts which took many low-to-middle income people off the rolls. The more people there are who pay nothing, the more awkward it is to use tax cuts to help them.