Fiction: A
small rebate or a refund to the American people will prompt renewed
consumer spending leading to a revived manufacturing sector and US
economy.These $300 rebates will be of particular importance to
lower income Americans and promptly spent by them.This is the type
of stimulus the economy needs: more consumer spending.
Fact:
Consumers see tax rebates as transitory, they do very little to
help the economy, and they generate little consumer spending.
Economic theory
suggests that tax rebates will not increase net spending, and a
recent study appears to bolster this theory.A survey, conducted by
professors Joel Slemrod and Matthew Shapiro of Michigan University,
examined what recipients expected to do with the rebates they
received under President Bush's 2001 tax relief plan.This plan
provided rebates of up to $300 for individuals and up to $600 for
married couples.
Slemrod and
Shapiro's study found that only 22 percent of households receiving
the rebates expected to spend the money.Furthermore, the survey
found that low-income households were no more likely to spend the
rebates than were higher income households.This finding runs
counter to the conventional wisdom that lower income individuals
would be more likely to spend the rebates than higher income
individuals.
Former President
Gerald Ford's administration tried to "stimulate the economy" in
1975 by giving every American a tax rebate.This plan's failure
caused the Carter administration to withdraw a similar proposal in
1977.The rebate idea has been tried and tried again and each time
it has failed in its purpose.This idea should be tossed on the ash
heap of discredited ideas with the rest of the outdated New Deal
era economic principles.
It appears that
individuals of all income levels understand that tax rebates do
nothing to change the long-term outlook for their personal
budgets.For example, when someone is unsure about his or her
job-stability, a one-time tax rebate does nothing to change that
insecurity.Permanent marginal tax rate cuts allow individuals to
keep more of the next dollar they earn and permit taxpayers to make
the crucial, long-term work and investment decisions that fuel
solid expansion of the economic activity.
For more on the
Slemrod/Shapiro survey, see the University of Michigan's Office of
Tax Policy Research website at .