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Vol. 38, No. 18 |
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2-6-2008 Ask the Expert, 2/7/08
In the ideal world, it’s a short-term loan for six to eight months, so they would borrow it on the market, which means from overseas investors. The theory would be since it’s the taxpayers’ own money, they would pay it back or have a smaller refund in the future. It’s a flow of eight to nine months. That’s not the way governments work, but that’s the theory. These days everything tends to be a permanent loan, especially when you’re running for re-election. Remember we are talking about a bill that so far has passed only the House. The Senate will make some changes, but it will look much like the House version, and the president will sign it quickly. Will this rebate have any negative impact on consumers in the future? The downside from the consumers’ standpoint is they forget what this is. It’s a pre-refund from April 15, 2009. Let’s say they usually get a $2,000 refund check every year. This rebate is coming out of that. If they get a $1,200 rebate check now, then their April 2009 refund would be only $800. It’s really your own money being paid to you earlier than next April. The negative exposure is you continue to count on the same refund next year but the check will come in smaller. They could send you a check in a lot of different ways, such as free money that you don’t have to pay back. But that’s not what this is. It’s a forced withholding adjustment. You’re getting it back instead of paying it in. Bush did it in 2001 also but it was a smaller amount. The Republicans said it had an impact and times did get better. From the macroeconomic standpoint, though, the fix is too late. It might have been a good idea in the second week of January, but it likely isn’t now. What are people going to do with the money? If they pay off credit cards, save it, there are some that say that’s a bad thing. I don’t think it’s a bad thing to pay down debt, because that’s still consumption. If it injects money into the banks, they’re the ones limping around right now, so that still helps. How do you recommend taxpayers use the money so that they get the greatest benefit from it? People who are inclined to invest won’t get the check because their income level is too high. So you can pay off what you’ve already consumed, save it or buy more. I’m neutral on that. For financial planning purposes, I’d say pay off debt first. Since banks are in trouble, that’s a good answer. But if I’m a retailer, I guess I’d rather see the other option. The bad thing is to spend your money on something you hadn’t planned to buy anyway. Are there any guarantees that this extra money in consumers’ pockets will help the economy? The greatest benefit is the Congress did something. When is the last time we had a bill of any importance? Economics prevailed and politics got put aside and everyone agreed to what they needed to do. Maybe they’ll stay in that mode and do something about energy or other area of need. I don’t think there’s a benefit for the economy. Another downside politically is it’s great that we needed to do something, but what if this doesn’t work? You can’t afford a plan B when you blow $160 billion all on the first try. This is too late and sort of misdirected.
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How will the government fund the proposed tax rebate?