Center on Budget and Policy Priorities: Administration Stimulus Plan Fails Tests For Achieving Most Effective Stimulus Gives Less Favorable Treatment To Families Under $40,000
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FOR IMMEDIATE RELEASE
January 18, 2008
2:00 PM
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CONTACT: Center on Budget and Policy Priorities
Michelle Bazie
202-408-1080
bazie@cbpp.org
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Administration Stimulus Plan Fails Tests For Achieving
Most Effective Stimulus Gives Less Favorable
Treatment To Families Under $40,000
Statement by Robert Greenstein, Executive Director
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WASHINGTON - January 18 - The centerpiece of the President’s new stimulus plan — a rebate provided by temporarily eliminating the 10 percent income tax bracket — fails crucial tests for providing the most effective stimulus, because it is not targeted on the tens of millions of families most likely to spend that rebate. In so doing, the plan flouts the advice offered yesterday by Federal Reserve chair Ben Bernanke. The plan also includes a business tax component that, at best, would provide modest stimulus.
This plan would bypass altogether, or provide only partial help to, the more than 40 percent of tax filers — over 50 million filers — with the most modest incomes. Families of four below $40,950 would get partial help or nothing at all.
The plan is being described as featuring a rebate of $800 to individuals and $1,600 to couples. That, however, is misleading. Only the 60 percent of tax filers with incomes high enough to be in the 15 percent tax bracket or a higher bracket could get those amounts.
Households that earn too little to be in the 10 percent bracket would get nothing. The fact that many of these workers pay large amounts of payroll tax would be ignored. Families of four making less than $24,900 would be shut out entirely.
All households in the 10 percent bracket — families of four with incomes between $24,900 and $40,950, and many families somewhat above that range as well — would get only a partial rebate. [1]
Not Well Designed to Give Economy the Most Help
As the Congressional Budget Office explained this week and as virtually all reputable economists agree, low- and moderate-income households will spend a larger share of any tax rebate dollars they get (and save as smaller share) than higher income households. As CBO has also explained, this means that tax rebates focused on lower- and moderate-income households inject more money into the economy quickly and are more effective as stimulus.
Federal Reserve Chairman Ben Bernanke made this point in testimony before the House Budget Committee yesterday. "If you're somebody who has lots of financial assets and you receive an extra dollar, you may not change your spending much because you can simply either put the dollar in your bank account or take out a dollar as you need it," Bernanke said. "If you're somebody who lives paycheck to paycheck, you're more likely to spend that extra dollar."
The Administration plan ignores these basic economic realities and excludes the very families it is most important to include if the stimulus is to be as effective as possible. The plan thus would save fewer jobs and do less to shore up a weak economy than it should.
Relatively Ineffective Business Tax Component
The plan also includes business tax incentives that CBO and various studies, including studies by Federal Reserve economists, have said had only modest effects at best when tried as economic stimulus in the last downturn. But if the effects of the proposed business tax cuts in boosting the economy are uncertain, one effect of those tax cuts is quite clear — they would drive states whose revenues are already declining because of the slowdown deeper into deficit, due to the linkages between federal and state tax codes.
States are required to balance their budgets even in recessions, so the plan’s business tax cuts would trigger larger state budget cuts or tax increases to close the bigger deficits. The areas of state budgets most likely to be cut would be health care — including health insurance for low-income children — education, and assistance to local governments, many of which are already suffering financially due to falling property tax revenues. These are the budget areas where the largest share of state budget cuts typically are made during recessions. In recent weeks, states already have begun to propose cuts in them.
While including relatively ineffective business tax subsidies, the plan omits any additional weeks of unemployment insurance benefits for laid-off workers whose UI benefits run out before they can find a new job, despite the fact that CBO and other analysts rate this very high as effective stimulus and it has been a basic component of stimulus packages adopted in every recession for decades.
The plan thus seems to favor Administration ideological or political preferences over the evidence on what would work best in helping to keep the economy out of a painful recession.
Both for the economy and for the sake of millions of struggling families, policymakers should do substantially better than this in fashioning a stimulus package.
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