Weighing The Impact Of A Possible Tax Rebate

With fears of a recession rising and the stock market tumbling, President Bush on Friday called for up to $150 billion in tax relief for consumers and business — and said there was no time to waste. Most observers expect that relief to take the form of tax rebate checks that will put money in the hands of consumers willing to spend. But it's not yet clear how much the checks will be for, or who will qualify for them.

The rebates would be designed as a one-time boost for a national economy that is in danger of sliding into the first recession since 2001, if it hasn't already edged across that line.

But some economists warn about potential pitfalls. Once the federal government opens up the floodgates of spending, it may be difficult to rein it in – especially in an election year. Another potential sticking point is that Americans may not spend their rebates. Putting the rebates in savings accounts, for example, would have no stimulating effect.

John Leahy, a professor of economics at New York University, says it is theoretically possible that a tax rebate will indeed stimulate the economy. But other economists are skeptical that a stimulus package will work.

There is also the question of who would get the rebate checks. Democrats want to target rebates to the most "economically stressed," says Democratic Rep. Barney Frank of Massachusetts. Republicans are looking for broad-based tax relief. In remarks to reporters after Bush's speech, Treasury Secretary Henry Paulson said a rebate should be "broad based" and benefit "those paying taxes."

Potential Sticking Points in Stimulus Package

When it comes to a potential economic stimulus package, Democrats and Republicans have put aside their usual partisan sniping and started what has been described as a "love fest."

President Bush and congressional lawmakers have vowed to come up with a bipartisan plan to help jumpstart the economy, and in press conferences throughout the week, they have extended an olive branch in the name of providing a fast-acting, short-term fix.

Neither Democratic leaders nor the Bush administration have detailed specific proposals — though it's clear Republicans and Democrats each have their favorites — but they do seem to be speaking the same language when it comes to providing temporary help. Democrats and Republicans alike have expressed strong support for a tax rebate, for example.

Leaders say the areas of agreement are huge. But are they really on the same page? What is likely to separate the two parties when they get to the negotiating table?

Among the issues that might trip up leaders negotiating a package is the question of who gets a tax rebate. The administration's economic stimulus guidelines, laid out by President Bush on Jan. 18, call for a $140 billion to $150 billion package, comprising a tax rebate and business tax incentives. News reports suggest the administration was considering a rebate of $800 for individuals, $1,600 per couple, though President Bush and his advisers refused to provide specifics.

In remarks to reporters after Bush's speech, Treasury Secretary Henry Paulson said a rebate should be "broad based" and benefit "those paying taxes."

But that last part could be a big sticking point for Democrats. There are millions of Americans who work full time and don't end up paying any income tax. If Republicans try to limit rebates to "those paying taxes," a lot of low-income people wouldn't qualify for a check. That's likely to be a big issue for Democrats.

Also unclear is whether the relief would be capped, or whether taxpayers at all income levels — including the wealthiest Americans — would receive a rebate check.

What about other ideas? Some Democrats have suggested providing heating assistance, increasing public housing help, increasing food stamps and expanding unemployment insurance — proposals not included in the president's guidelines.

Economist Martin Feldstein, a former Reagan administration official who is said to be advising the White House on the issue, recently dismissed the idea of letting people collect unemployment benefits for a longer period. He said doing so could actually slow the economy's recovery.

Other economists argue that temporarily extending unemployment-insurance benefits would provide the largest bang-for-the-buck compared with a range of other spending and tax-cut proposals.

What about business tax cuts? Paulson told reporters the administration hoped to target the bulk of the relief to consumers. But also crucial to the White House is providing tax relief to business owners, so they might expand their operations and create new jobs. Democrats have not given any indication that this is a priority for them.

Bush is not insisting that Congress extend tax cuts that are due to expire in 2010 as part of the stimulus package — though he did say Congress should take care of that as soon as the stimulus is passed. With both chambers of Congress controlled by Democrats, that's probably not very likely.

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