January 19, 2008 in Nation/World

Economic stimulus includes relief, incentives

Kathy M. Kristof and Jonathan Peterson Los Angeles Times

In a blast from the not-too-distant past, the Bush administration has proposed an economic stimulus package that would put cash in the hands of U.S. consumers in the hope that America will get up and go shopping. How might this stimulus package work, and how could it affect you?

Q: What has been proposed?

A: Nothing as formal as a proposal is on the table. But President Bush has asked Congress to work with him on a $150 billion package that would:

•Provide “direct and rapid” tax relief to individual taxpayers.

•Create tax incentives for businesses to expand operations and create jobs.

Experts believe that means there would be write-offs for companies that buy business equipment or invest in research and development. And there would be a tax rebate program, much like the one that was conducted in 2001 when Bush was first elected.

Q: Where would the rebate come from?

A: No one knows for sure, but an analysis by the Tax Foundation speculates that the current 10 percent tax bracket would be dropped to 0 percent for one year – meeting Bush’s goal of creating a temporary but swift break. Currently, single filers pay 10 percent tax on about $8,000 in taxable income, while married couples pay 10 percent on the first $16,000 they earn. By dropping this bracket to zero, singles would pay $800 less and married couples would pay $1,600 less on their 2008 returns.

But because Bush wants to stimulate the economy quickly, the tax cut would be advanced to taxpayers through checks sent by the Internal Revenue Service.

Q: When would I be likely to receive a check?

A: Even if this passed quickly, the IRS probably would have a hard time sending out checks before it finishes processing tax returns for the April 15 filing deadline. If 2001 is any guide, the first checks would go out in the summer.

Q: Why would this stimulate the economy?

A: Economic growth is fueled by consumer spending. The presumption is that if Americans get money, they’ll spend it. If all goes well, that creates an economic multiplier effect, where additional spending creates additional hiring, which creates additional income, which creates additional spending, said Peter Morici, economist and professor at the Robert H. Smith School of Business at the University of Maryland. In the absence of other economic mishaps, $1 spent eventually can create $2 in growth, he said.

Q: Why did Bush say that a stimulus is needed now?

A: Economic growth slowed sharply late last year, with some economists maintaining it might have even gone negative in December. Employers created fewer jobs, underscoring the fragile outlook. Virtually all experts believe that a weak housing market, exacerbated by continuing failure of subprime mortgages granted to people with shaky credit, threatens further harm.

Q: Won’t spending all this money cause the deficit to balloon and further hurt the economy?

A: There’s great debate about this question. Some analysts say that a properly crafted measure will do more good than harm, sparking gains in consumer spending, raising confidence – and then expiring before it does lasting damage to the nation’s ledger sheet. Others say that without addressing some fundamental shortcomings in the economy, the spending measure will provide a temporary lift to spending but won’t result in enough of a boost to lift the economy out of the doldrums.

Q: What are the political prospects of this happening?

A: The prospects for passing some sort of stimulus plan are good, although it might not be exactly as envisioned by Bush. Members of both parties Friday made conciliatory remarks about the need for a proposal, but the Democrats are not convinced that the tax code is the best way to deliver relief.

Q: Why?

A: The primary reason is that you can offer a tax cut only to people who pay income taxes, and 42 million American households don’t earn sufficient income to pay taxes at today’s rates. That would leave them out of any relief plan.

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