Recession tax legislation: Does it work?

Welcome to our world, D.C.

Economic concerns have dominated the lives of most of us out here in the rest of the country for quite a while.

But now, presidential candidates are talking loudly, if not particularly coherently, about it. Tuesday, prompted by fear that the U.S. economy is faltering, the Federal Open Market Committee implemented an emergency interest rate cut.

And Dubya and Congress are considering once again sending us taxpayers a rebate check (blogged about last week here).

While you can never safely say the involvement of politicians is a good thing, this is one of those rare times when a lot of folks are in favor of the action.

But is the rebate idea really a good one?

Tuesday, the Senate Finance Committee began hearings on "Strengthening America’s Economy: Stimulus That Makes Sense."

The panel will continue listening to testimony tomorrow. You can read the statements made on Tuesday here; the witness list for Thursday’s hearing is here.

A look back at tax rebates: In conjunction with those hearings, the Joint Committee on Taxation has produced an "Overview of Past Tax Legislation Providing Fiscal Stimulus and Issues in Designing and Delivering a Cash Rebate to Individuals."

The report notes that previous recessions began in 1960, 1970, 1974, 1980, 1982, 1990 and 2001. Subsequently, say JCT analysts, tax bills passed in 1962, 1964, 1971, 1975, 1981, 1992, 2001, 2002, and 2003 were attempts to keep the economy going via breaks to both businesses and individuals. The new document examines some of those provisions.

On the individual tax side they include:

• Cash rebates
• Increased standard deduction amounts
• increased dependent exemptions or credits
• Reduced ordinary income tax rates
• Increased Earned Income Tax Credit (EITC)
  
• Additional credit for FICA taxes
• Reduced capital gains rates
• Reduced dividend income rates

A tax rebate, which the JCT report calls a "lump sum" transfer of income form the government to the taxpayer, "can act as a fiscal stimulus if taxpayers respond to the increase in income by increasing their consumption."

And that, my friends, is the gazillion dollar question.

The report goes on to say that studies of the previous lump sum transfers "have generally found that the rebates provided modest stimulus to consumption."

But they sure added greatly to political posturing, especially in an election year.

Cynical? Me? I prefer the term "realistic."

Missing the most willing to spend: Economists are quick to note that a major issue with rebates is that they go to taxpayers.

Sounds fair enough, right? But a lot of folks who would spend the money to help jump start the economy aren’t taxpayers.

No, they’re not scofflaws. They simply don’t make enough to have to file returns. Since they’re not in the system, they won’t benefit from the rebates.

Case in point, my mother. The bulk of her income is from Social Security, so she hasn’t had to file a tax return in years. Because of that, she didn’t get that $300 rebate back in 2001. And trust me, the woman who’s never found a pair of shoes she didn’t like would definitely have spent the government check as soon as she got it!

The hubby and I, on the other hand, banked our tax windfall back then. We’ll likely do the same this time.

Maybe that’s not the economically patriotic move, but for us, it’s the fiscally prudent one.

And just like politics, where everything is local, we’ll definitely be thinking about US and not necessarily the USA when we get our tax rebate check.