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Weighing The Impact Of A Possible Tax Rebate

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Weighing The Impact Of A Possible Tax Rebate


Weighing The Impact Of A Possible Tax Rebate

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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This is WEEKEND EDITION from NPR News. I'm Scott Simon.

Yesterday, at the end of another week of discouraging economic news, President Bush announced he is working on a plan to stimulate the economy and he hopes to avoid a recession.

President GEORGE W. BUSH: By passing an effective growth package quickly, we can provide a shot in the arm to keep a fundamentally strong economy healthy. And it will help keep economic sectors that are going through adjustments, such as the housing market, from adversely affecting other parts of our economy.

SIMON: President Bush said a stimulus package would need to be large, around $150 billion, and provide broad-based tax relief. Most observers expect that relief to take the form of tax rebate checks that would put money in the hands of consumers willing to spend. It's not clear yet just how much the checks will be for even who will be getting them, but we wanted to understand how all this would actually work.

So, we asked NPR's Adam Davidson to look into what would happen if everyone got a check for, say, $500. Adam joins us from New York.

Adam, what did you find out?

ADAM DAVIDSON: Well, I asked an economist to meet me on a street corner in New York, and I have some tape from that.

I'm sitting at the corner of Broadway and Ann Street in Lower Manhattan. I'm in front of J&R Computer World, and I would imagine this is where many New Yorkers would come if they suddenly found themselves with $500 extra to spend. I see a bunch of digital cameras. There's laptops here; iPods. And I'm here with John Leahy(ph).

Professor JOHN LEAHY (Economics, New York University): Leahy.


(Soundbite of laughter)

DAVIDSON: An economist with New York University.

Prof. LEAHY: Yes.

DAVIDSON: And you're going to explain to me what happens when someone suddenly spends $500 here?

Prof. LEAHY: If we gave somebody $500, and this person was $500 short of making a major purchase, say, at J&R, so they go to J&R and they buy a camera. J&R earns money. J&R pays its employees. Then, the employee may take the added income, come to mini-central Italian shoe company across the street here on Nassau Street and buy a new pair of shoes. The shoe salesman now is feeling a little richer. They may go to this travel shop here…


Prof. LEAHY: …may go to the travel shop, take a trip, maybe to Las Vegas or Miami. People in Miami are now feeling better because there are people at their restaurants and in their hotels. Five hundred dollars probably itself will not do all of this because it's only $500, but 50 billion would be a pretty significant kick to the economy.

DAVIDSON: You're making it sound like a really great idea, this fiscal stimulus.

Prof. LEAHY: There are costs. I mean, the cost is - first of all, we do have to pay things back. We shouldn't think of this as a free lunch. The second cost -and most economists are kind of leery - that once the federal government or any government opens up the floodgates of spending that they will find it very difficult to rein in their desires.

It's really fun to spend money, especially as a politician, especially as politicians coming into an election year who want to get reelected, who want to be seen as doing things for their constituents. And there's always the worry that the government will take the license to spend and take it to the limit.

DAVIDSON: What happens if I get that 500 bucks and I don't go to J&R? I don't spend it. I put it in my account over there at Citibank.

Prof. LEAHY: Suppose the government borrowed the money to give you the $500. Suppose they borrowed it from Citibank. And suppose you put the money into Citibank. Then, basically you've given the government $500 so that the government can give you $500. So in that case, nothing would happen.

SIMON: That was NYU economist John Leahy, talking to NPR's Adam Davidson in a street corner in Lower Manhattan.

Adam, Mr. Leahy laid out the cost and benefits. I'm still not clear if he thinks it's a good idea or not. Clearly, he thinks just giving you the 500 to put into Citibank isn't a good idea.

DAVIDSON: And that's part of the problem. When you give everyone in America or some subset of Americans money, we don't know what they're going to do with it. For this to work as a stimulus, we need them to spend it. We don't care what they spend it on. They can buy an iPod. They could buy anything as long as they are taking that money, giving it to someone else who's then going to take that money and give it to someone else. If they put it in a savings account, there is no stimulus.

Also, we need it to be the right amount to not cause too much spending or so little that it doesn't affect it. There are all these incredibly technical requirements. And Leahy, he's of the belief that it's theoretical possible to do it right. Other economists say it's not even theoretically possible to really have an effective stimulus.

SIMON: How do you really get that $500?

DAVIDSON: This is where the details are still yet to be worked out, but you may, one day, go to your mailbox and there's a check for 500 or 800 bucks. And Democrats and Republicans both want to get that money out to people, but one of the big questions is which mailbox does that check go to. You know, Democrats want it to go to a poor group of people, even people who don't pay taxes at all. Republicans are not crazy about that idea, and want to get it in more mailboxes among the wealthier folks as well as the middle class.

SIMON: NPR's Adam Davidson in New York. Thanks very much.

DAVIDSON: Thank you, Scott.

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