Would tax rebates work?

The government aims for more spending, but in the past many saved their checks.

Pat Wellenbach/AP
At Wal-Mart: Shoppers kept busy in Augusta, Maine, earlier this month. While some consumers would spend a tax rebate, others say they would put it in savings or pay off debts.
Dennis Cook/AP
Capitol Hill: Federal Reserve Board Chairman Ben Bernanke testifies on Jan. 17 in Washington DC before the House Budget Committee. On Jan. 14 Mr. Bernanke met with House Speaker Nancy Pelosi to discuss ways Congress might act to boost the slowing economy.Through a new stimulus package, the government is hoping to add $145 billion to the economy. While some consumers would spend a tax rebate, other say they would use the money to pay off debts or would save it.

If the US government can zip tax-rebate checks into the mail – as in legislation Congress is now developing – here's an idea of the type of economic stimulus it might provide:

•The gross domestic product could grow by as much as an extra percentage point, some economists say. The extra growth could translate into about 400,000 jobs that would not have been there otherwise.

•There could be a psychological lift that ends the current gloom-and-doom atmosphere in corporate boardrooms. On Monday, the world glimpsed the depth of negativism when stock markets from Europe to Canada to Asia nose-dived. The US markets were closed for the Martin Luther King Jr. holiday.

•The rebate checks could be a boon to tourism, home-appliance companies, and electronic-appliance stores.

Altogether, the government is hoping to add $145 billion to the economy. While the exact amount per person hasn't been determined, some estimates on Capitol Hill put it at $800 per taxpayer.

This would be almost four times the amount the government spent in 2002, the last time it tried to stimulate the economy.

Congress is more than aware of the need for speed: On Friday, Sen. Arlen Specter (R) of Pennsylvania told Fox Business Network that a bill could be on President Bush's desk within a week. In a best-case scenario, that might mean checks would get to consumers by spring.

In 2002, once the printing presses started to roll, the government printed as much as $8 billion a week in checks. It took ten weeks to get them all in the mail.

"It may be too late, but it could mitigate the severity of the downturn or even jump-start us out of a recession," says Mark Zandi of Moody's Economy.com. "But I think that stimulus is helpful."

Mr. Zandi, who is skeptical Congress will act quickly, estimates the proposed package could add $80 billion to real GDP in the second half of the year. That translates to about 1 percentage point of annualized growth. He also estimates that would support some 400,000 jobs.

Economist Ethan Harris of Lehman Brothers offers a slightly different analysis. He estimates that a stimulus package of $100 billion could add 0.8 percent growth to the second quarter and 0.2 percent to the third quarter. "Perhaps even more important," he writes in a research report to his clients, "the policy would provide a psychological boost to the economy."

The 2002 rebates, however, were not as successful as anticipated. Recipients used more money than expected to pay down debt and contribute to savings. Of some $38 billion in rebate checks, only $8.36 billion was spent, according to a University of Michigan survey.

"The survey suggests that if the circumstances are similar, a stimulative package may not have the magnitude of stimulus one might hope," says Joel Slemrod, a co-author of the report and an economist at the university in Ann Arbor.

Even Treasury Secretary Henry Paulson acknowledges that any stimulus plan has its limits. "There are no silver bullets," he said at a press conference Friday. "There's nothing that's perfect, but to be quick and to focus on the areas we've mentioned, give money to consumers – there's plenty of evidence. You give money to people quickly; they're going to spend it...."

That will certainly be the case with Joey Infante, a hairdresser in New York. "I'm going to Disney World," he announces. "I can stay with my sister and go to my favorite ride, Space Mountain."

In Chattanooga, Tenn., Jonathan Bragdon and his wife will buy a stove and dishwasher because they're moving. "The rebate would mean less money I put on the credit card," he says.

Gina Daily in Gulf Shores, Ala., envisions spending any government payout on expanding her seafood store. "I was supposed to have an outdoor produce market on one side of my property, but the contractor left town. So I can use the money to grow," says Ms. Daily, owner of Gulf Shores Seafood.

Others will take the money and save, as the University of Michigan study found. That's the case for Joseph Roca, who lives in Brooklyn, N.Y. "I'll put it into my individual retirement account," he says. By way of contrast, in the last rebate in 2002, he plowed the money into his business in Florida.

Yet others plan to pay down their credit cards and other bills. "That money goes towards my mortgage payment," says Guillermo Olaya of Rahway, N.J. "It might give me a little breathing room."

In 2002, the University of Michigan went back to people who had used the money to pay down their credit-card balances to see if they had picked up spending again. "What they said is they did not put their credit-card balances back up right away," says Mr. Slemrod.

But Craig Shearman of the National Retail Federation maintains that paying off the plastic frees up credit lines to spend more. "It moves into the economy," he argues.

Mr. Bush has also proposed giving some kind of tax break to businesses, but it may be even less successful at providing immediate help. Matthew Shapiro, an economist at the University of Michigan, studied the effects of the 2002 tax break, which allowed business to accelerate depreciation of certain purchases. It boosted GDP by no more than 0.1 percent and added 100,000 jobs, he estimates. "It was barely measurable," he says. "It helped a very narrow range of firms that buy things that last a long time."

Business may not be supportive if Congress mimics that 2002 tax break. "Our guys don't like it. It forces them to make decisions before they are ready," says Thomas Duesterberg, president of the Manufacturers Alliance/MAPI in Arlington, Va. "To get a change in business takes a lot longer."

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