First sign of stimulus? Probably your paycheck.

Tax cuts for workers will show up by May or June – but will total only about $13 a week.

By , Staff writer of The Christian Science Monitor

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    Most American workers will see a little more in their paychecks starting this spring because of the federal stimulus.
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For many Americans, the first sign of the Great Stimulus of 2009 will be a few extra dollars in their paychecks this May or June, due to a new tax credit to be doled out throughout the year.

The weekly bump won’t be much – about $13 on average – but the hope is that millions of people will feel just enough richer to splurge on something they might not otherwise have bought.

When the US might first see the effect of the stimulus on the overall economy is a more complicated question. Some items in the bill – such as the personal tax credit, a tax break for first-time home buyers, and expanded unemployment benefits – may provide a quick monetary boost. Others, notably the billions in infrastructure spending, won’t peak until 2010.

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In fact, it might be years before economists get a handle on how, or if, the stimulus boosted the nation’s gross domestic product (GDP) in its hour of need. That’s because success in this case might be measured not by a sudden spike in business, but by things that don’t happen: layoffs not made, bankruptcies averted, and foreclosures forborne.

“One thing is certain: There is no ‘silver bullet.’ The recession will take time to play out, and the economic stimulus package and financial-sector reform efforts will take time to produce results,” concludes a new Wachovia Economics Group analysis.

A 3.8 percent boost?

In signing the stimulus legislation Tuesday in Denver, President Obama struck a more hopeful note, perhaps, but also indicated that it would not be a cure-all.

“I don’t want to pretend that today marks the end of our economic problems. Nor does it constitute all of what we have to do to turn our economy around,” the president said. “But today does mark the beginning of the end, the beginning of what we need to do to create jobs for Americans scrambling in the wake of layoffs.”

The stimulus bill could by the fourth quarter of 2009 provide an increase of anywhere from 1.4 percent to 3.8 percent in what the GDP would otherwise have been, reports the Congressional Budget Office (CBO).

This increase might fade a bit, to between 1.1 percent and 3.3 percent of GDP, by 2010 and then fall off year by year, according to the CBO. The legislation’s stimulative effect would end by 2014.

But the macroeconomic effects of any economic stimulus program are uncertain, wrote CBO director Douglas Elmendorf in a letter to Sen. Judd Gregg (R) of New Hampshire, the ranking Republican on the Senate Budget Committee.

Big stimulus is rare

One reason is because federal pump-priming on this scale has rarely been attempted. “Some economists remain skeptical there would be any significant effects, while others expect very large ones,” wrote Mr. Elmendorf.

The $787 billion stimulus bill, if nothing else, is a landmark achievement for a new chief executive. It took President Ronald Reagan until August 1981 – or seven months in office – to get his tax-cut-based economic plan through Congress. Mr. Obama has pushed through a larger piece of legislation in just over a month.

Reagan’s tax cuts were approved with some support from Democrats, however. Obama’s stimulus – of which tax cuts make up more than one-third of the total – drew only three GOP Senate votes, meaning its success or failure could become a sharp political issue in the future.

The tax cuts in Obama’s stimulus are intended to be the shock troops of recovery, moving quickly into the economy to revive consumer and business spending.

A $400 tax cut

The centerpiece individual tax reduction, the Making Work Pay tax credit, will be worth up to $400 for this year and next for individuals making up to $75,000, and $800 for couples making up to $150,000. (Above those amounts, the tax credit is phased out.)

Spread over a whole year, the amount is about $8 a week. But because the cut won’t kick in this year until the Internal Revenue Service has had time to adjust its withholding tables, the average amount for 2009 should be about $13.

The hope is that taxpayers will react to the new cash, however small it is, by temporarily adjusting their opinions of how much money they make, and spending accordingly. By contrast, President Bush’s tax-cut stimulus of 2008 came in a lump-sum check of $300 on average, which many Americans treated as a one-time event, causing them to save a significant portion rather than spend all the cash.

An $8,000 housing credit

Other tax reductions in the 2009 bill include an expansion of the $1,000 child tax credit to more low-income families and an $8,000 tax credit for first-time home buyers who purchase their homes before Dec. 1.

New-car buyers can write off the sales taxes on those purchases, if they buy before the end of the year. Homeowners who add energy-efficient windows, furnaces, or air conditioners can get a tax credit to cover up to 30 percent of the costs, up to $1,500.

College students are eligible for tax credits of up to $2,500 to help pay tuition and related expenses in 2009 and 2010.

The bill also continues the annual Washington practice of exempting many middle-income taxpayers from the Alternative Minimum Tax, which was designed 40 years ago to recoup money from the wealthy but hasn’t been indexed for inflation. Because most taxpayers have already figured this adjustment into their spending patterns, the AMT patch won’t do much to stimulate the economy, most economists say.

Through 2010: $584 billion

Overall, the stimulus legislation will cost the US government about $584 billion over two years, figures the CBO. (Its total $787 billion cost comes from adding in money distributed in further years.) Of that amount, tax changes account for about $240 billion.

Direct spending on infrastructure will take more time to filter through the economy than will tax cuts.
“The infrastructure investments ... are not likely to boost growth until 2010 and 2011,” writes Diane Swonk, chief economist of Mesirow Financial in Chicago, in a new analysis. “Most agree that the payoffs in terms of employment are greater with infrastructure investments than tax cuts. The problem is that they take time to get up and running.”

Associated Press material was used in this report.

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