Stimulus Plan Fairly Aimed at Middle-Class But Could Be Much Better

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Negotiations between House Speaker Nancy Pelosi, Minority Leader John Boehner and Treasury Secretary Henry Paulson resulted yesterday in an agreement to spend about $146 billion to jumpstart the economy. About two thirds of that would go towards tax rebates for households, and a third would go towards tax breaks for businesses. The tax rebates would be targeted toward middle-income taxpayers, including working people who pay federal payroll taxes but who do not have enough income to owe federal income taxes. However, the rebates would provide no help for people who do not have earnings (including the unemployed and many Social Security and welfare recipients) even though these people are arguably the most likely to spend any money given to them, thereby pumping the money immediately into the economy.

Some Democrats in the Senate, like Finance Committee Chairman Max Baucus (D-MT) have expressed an interest in adding increased unemployment benefits or food stamps to any stimulus package to reach these people. It appears that Speaker Pelosi felt forced to give up demands for increasing these benefits in order to get the Bush administration to agree to making the tax rebates available for more lower-income people.

The Tax Measures

The rebates would be a maximum of $600 for singles and $1,200 for married couples. For people whose tax liability is below $600 (or $1,200 for couples), the rebate would be equal to tax liability, and a minimum benefit of $300 for singles and $600 for married couples would be available so long as they have at least $3,000 in earnings. Finally, an additional $300 for each child would be available to anyone with any earnings.

The rebates would begin to phase out for singles with incomes of $75,000 and married couples with incomes of $150,000. As a result, they would be more targeted towards the middle-class than any tax bill we've seen during the Bush years.

The tax rebates would be advances on a one-year reduction of the 10 percent income tax rate to 0 percent for the first $6,000 of income for singles or $12,000 of income for married couples for 2008.

The business tax breaks would consist of so-called bonus depreciation (allowing businesses to immediately write off 50 percent of equipment and other capital) and doubling the amount of certain investments that small businesses can immediately expense from $125,000 to $250,000.

The Spending Increases that Were Left Out

Several advocacy organizations have called attention to the fact that the whole point of an effective stimulus is to put money in the hands of people who are most likely to spend that money right away to increase demand and provide an immediate boost to the economy. The stimulus proposal announced yesterday, however, would give smaller tax rebates to those people who work and pay federal payroll taxes but have incomes too low to pay federal income taxes.

Another group who would likely spend any money given to them includes those with no or very little earnings, who could be helped with increased unemployment benefits or food stamps. An expert with Moody's has studied the effects of different stimulus measures on the economy and finds that increased UI benefits and food stamps provide the greatest increase in demand for each dollar spent. Business tax breaks, on the other hand, produce relatively little demand for each dollar spent. Investment usually takes quite a while to plan and implement and most investment is made by businesses that would not have tax liability anyway.

These aspects of the plan are very troubling, but they are not sufficient reason for members of the House to oppose it. The plan does provide some help for low-income and middle-income people, and House passage could be followed by a much improved bill in the Senate. Hopefully, this could lead to a final bill that does more for the economy and for Americans who need help.

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