Tax rebates: Where's your check?
Lawmakers are still working out final details on cutting checks to all Americans to fight recession.
NEW YORK (CNNMoney.com) -- Consumers fuel the economy and if they're strapped, the thinking goes, better get them some cash to spend.
The biggest component of any government plan to jump-start the economy is expected to be issuing tax rebate checks - both Republicans and Democrats are pushing the idea of sending out checks for several hundred dollars if not more.
But their effectiveness is debated, and it could be summer before Americans see any real cash.
In a statement on the economy delivered Friday morning, President Bush said any plan should feature "direct and rapid income tax relief" to boost consumer spending.
"Letting Americans keep more of their own money should increase consumer spending, and lift our economy at a time when people otherwise might spend less," he said.
As of Saturday morning, there was little expectation that a deal would be finalized before Tuesday when Congressional leaders are expected to meet with President Bush. In his Saturday radio address, Bush said he favored tax cuts but opposed any spending programs that could appear in a Democratic stimulus plan,
Whatever the final decision, here's how a rebate would work, when you're likely to get a check and how it might affect the economy.
Once a rebate is decided on, the IRS could start mailing out checks by the end of June since the agency is now in the middle of the 2007 tax-filing season, said Jason Furman, a senior fellow at the Brookings Institution. The IRS, however, is not yet commenting on the matter since negotiations about the rebate are still under way.
The goal, however, for both Democrats and Republicans is to get the money into the hands of consumers as soon as possible.
In a briefing after the president's statement, Treasury Secretary Henry Paulson said, "If (tax relief) is broad-based and simple, I believe we'll be able to get it out quickly and in time to make a difference this year."
On Friday afternoon, House Financial Services Chairman Barney Frank, D-Mass., told CNN he believed lawmakers could pass a stimulus package, including a rebate, by March 1.
Right now, President Bush is said to want an income tax rebate that would be generated by eliminating the 10 percent tax bracket, which applies to roughly the first $8,000 of income for single filers and the first $16,000 of income for married couples filing jointly.
That would mean taxpayers could get rebates of up to $800 if single, or $1,600 if married.
But neither President Bush in his statement nor Paulson in a briefing afterwards would confirm that amount. "I don't want to play bigger than a bread box," Paulson told reporters. "The president is focused on broad-based tax relief for those paying taxes."
Who would get it
Democrats could get on board with an income tax rebate if it's fully refundable, meaning that everyone with earned income would get the full rebate, even if they didn't make enough money to owe income tax, said Furman.
Otherwise, roughly 40 percent of tax filers (which is more than 50 million households) would get only a partial rebate or no rebate at all, according to the liberal Center on Budget and Policy Priorities.
A significant portion of that 40 percent would be families of four making between $25,000 and $40,000, the CBPP said.
There are a few ways that could be prevented, Furman said.
One way is to offer tax credits, a dollar-for-dollar reduction of your tax bill. If it's refundable, it means you get the credit even if your tax bill is $0 or something less than the full credit.
Another way is to have the rebate be a payroll tax rebate. The payroll tax - 6.2 percent of your wages - is what's taken out of everyone's paycheck to fund Social Security, no matter how low your annual income.
A payroll tax rebate would not affect your Social Security benefits or the long-term solvency of the entitlement program, Furman said, because it would really serve as a tax credit. In other words, money from your paycheck would still be taken out and put towards Social Security, but the federal government would send you a check that would serve as an advance on a refundable tax credit on your tax return.
Do rebates work?
Economists disagree about the effectiveness of rebates. "Estimates of how much consumers spend in response to various stimuli are treacherous," former Federal Reserve Governor Lyle Gramley wrote in an e-mail to CNNMoney.com.
Gramley noted, for instance, that estimates of spending by consumers who cash out home equity range wildly - from 0 to 60 cents on the dollar.
But Furman and Mark Zandi, chief economist of Moody's Economy.com, point to a study published last year that found in 2001, when households received rebates between $300 and $600, consumers spent two-thirds of those rebates within six months of receiving them. The study estimates the rebates gave a healthy boost to consumer spending at the time.
But, Zandi noted in an e-mail, "The effectiveness of a tax rebate on consumer spending would be enhanced if targeted to lower and middle income households that are more financially constrained and thus more likely to quickly spend the rebate check."
A study of various stimulus options by the Congressional Budget Office released this week, meanwhile, found that a one-time rebate could be highly cost-effective in terms of boosting demand if it's focused on people most likely to spend it. It also found that a rebate could take between 6 months and a year to achieve its full effect in boosting demand.
If rebate checks are first sent out starting in late June - almost six months from now - it's not unreasonable to wonder if that is soon enough to be effective. Zandi thinks it could be.
"It certainly won't forestall a recession if we are in one, but it could reduce the severity of a downturn or make it shorter," he said in separate e-mail. "Say the rebate is $100 billion. Two-thirds will get spent by year end if the 2001 tax rebate is a guide. Thus, $60-$70 spent in the second half of the year will translate into about 1% of annualized real GDP growth. That is measurable."