Tuesday, March 25, 2008

IRS Stimulus Checks

The major Sacramento newspaper ran a short article on ways to spend your upcoming "economic stimulus check". I wanted to know if this was just an advance on any rebates we might receive next year, or if it's "free money".

According to the FAQs on the IRS web site, it's free money. Well, not really, because it's just money that's been taxed and redistributed. These two questions and answers seem very clear on the subject:

Q. Is my stimulus payment taxable?

A. No. You will not owe tax on your payment when you file your 2008 federal income tax return. But you should keep a copy of the IRS letter you receive later this year listing the amount of your payment. In the event you do not qualify for the full amount this year but you do next year, you will need to have the letter as a record of the amount you previously received.

Q. Will the payment I receive in 2008 reduce my 2008 refund or increase the amount I owe for 2008?

A. No, the stimulus payment will not reduce your refund or increase the amount you owe when you file your 2008 return.

Don't economists agree that the last time this was done, early in President Bush's tenure, it didn't work as expected? I'm not an economist so don't understand fully how this works at a macro and micro level, but I'd swear I've read in several sources that last time didn't do much good. No harm, but no good, either.

So, am I reading this correctly that Uncle Sugar is just going to write checks to over 100 million Americans? Just write checks to us out of the general fund, thereby putting the country further into debt?

As a math guy, I understand a small part of it. I used this calculator to determine that I'm eligible for a $900 rebate, to be deposited May 9th. Let's say I blow the whole $900--part of that will be recovered by the government in taxes on the businesses from which I buy. They'll use the untaxed portion of that $900 to buy other products, which will be counted as income for those suppliers and be taxed accordingly. Those companies will buy--well, you get the idea. In theory, I suppose that $900 "windfall" to me will return more than $900 to the federal treasury.

But if that's true, doesn't it show the benefits of people keeping their own money, of lowering tax rates so people have more to spend? Every economist knows that lower tax rates can increase tax revenues because people and companies then have more money to spend.

In this case, instead of giving me money to spend, why not just lower my tax rate?

I admit that the economics of these stimulus checks is not my area of expertise, so I invite the comments of those with more knowledge than I have.


Eric W. said...

It might have to do with the fact that the Dems in Congress won't pass a bill to lower taxes, but they love giving out checks.

Coach Brown said...

How much will it impact the economy?

Well, I think we are looking at 160 billion dollars in government money, and a GDP of over 14 trillion. Meaning if everyone spent it on buying something that it would hardly make a ripple.

I would tell you the economic reasoning for it......if there was one. It was purely political and will not change a thing. If the government isn't careful, they'll make a moderate situation worse. Bailing out Bear Stearns was smart, but that's not all they've bailed out. You just don't hear about on the mainstream news.

Eventually, the market has to clear out the crap and realign itself, like its supposed to.

Mr. W said...

yeah that's the whole idea of giving money back is that it will be spent on items that create revenue for the companies. And most states have some sort of state sales tax which also generate money for the government.

A lot of people say that you need to raise taxes to pay for everything. But if you raise taxes people won't spend because they are saving their money to pay taxes.

It is a definite fine balance that needs to occur.

Quincy said...

It's worse than you state. It's not money that's been taxed and redistributed, it's money that's being borrowed from the fed and distributed. That means we the people get to pay it back with interest. Also, it's very likely that the fed created more dollars to fund the bonds, meaning more inflation. It's like eating a bag of M&Ms for energy... short term buzz, then reality sets in.

Ellen K said...

The way inflation is going to spiral, I would imagine that my check will just about cover the gas bill for one month.