Short Nerd Chief

Politicos agree on stimulus package (for some)

Posted by Fred on January 25, 2008

Update 2/8: Congress and the President have agreed on a revised package.  See here for more.

So House leaders and the Administration have reached a deal on an “economic stimulus” package, the centerpiece of which will be tax rebates to some workers.  The details haven’t really been released, but the Post describes it this way:

Under the deal, nearly everyone who earned a paycheck in 2007 would receive at least $300 from the Internal Revenue Service — $103 billion in total. Most people would receive rebates of $600 each, or $1,200 per couple. Families with children would receive an additional payment of $300 per child. Workers who earned at least $3,000 last year — but not enough to pay income taxes — would be eligible for $300.

The way it will actually work is that the tax rate on the first $6,000 of earnings for individuals and $12,000 for couples will be reduced from 10% to zero. In addition, families will be eligible for an additional $300 per child.  Individuals with Adjusted Gross Incomes above $75,000 and couples with AGIs above $150,000 will see their rebates phased out.  You’ll get a rebate even if you would otherwise pay no income tax (due to deductions).

Here’s a summary, as best I can figure out:

Individuals

AGI Children
0 1 2 3 4
$3,000 $300 $600 $900 $1,200 $1,500
$4,000 $400 $700 $1,000 $1,300 $1,600
$5,000 $500 $800 $1,100 $1,400 $1,700
$6,000 $600 $900 $1,200 $1,500 $1,800
$6,000 to
$75,000
$600 $900 $1,200 $1,500 $1,800
$75,000 to $87,000 Unclear, but will be gradually reduced from above to $0 as incomes increase
Above $87,000 0 0 0 0 0

Couples

AGI Children
0 1 2 3 4
$3,000 $300 $600 $900 $1,200 $1,500
$6,000 $600 $900 $1,200 $1,500 $1,800
$9,000 $900 $1,200 $1,500 $1,800 $2,100
$12,000 $1,200 $1,500 $1,800 $2,100 $2,400
$12,000 to
$150,000
$1,200 $1,500 $1,800 $2,100 $2,400
$150,000 to $174,000 Unclear, but will be gradually reduced from above to $0 as incomes increase
Above $174,000 0 0 0 0 0

The stimulus package uses AGI, not taxable income. This means that only a select few deductions from income are included.  401(k) contributions are excluded entirely from taxable wages. Standard and itemized deductions don’t reduce AGI.  The IRS defines it as:

AGI is defined as your taxable income from all sources including wages, salaries, tips, taxable interest, ordinary dividends, taxable refunds, credits, or offsets of state and local income taxes, alimony received, business income or loss, capital gains or losses, other gains or losses, taxable IRA distributions, taxable pensions and annuities, rental real estate, royalties, farm income or losses, unemployment compensation, taxable social security benefits, and other income minus specific deductions including educator expenses, the IRA deduction, student loan interest deduction, tuition and fees deduction, Archer MSA deduction, moving expenses, one-half of self-employment tax, self-employed health insurance deduction, self-employed SEP, SIMPLE, and qualified plans, penalty on early withdrawal of savings, and alimony paid by you. Do not deduct your standard or itemized deductions.

The assumption behind the stimulus package is that people will take the money they don’t have to pay the government and spend it, putting money into the economy.  If that is indeed the assumption, why the one-shot rebate check? Why not just cut the overall marginal tax rate, so that people have more to spend all the time?  It’s not at all clear that the tax relief will go into consumer goods instead of savings against catastrophe.  After all, once the money is received, it’s not going to come again.

The stimulus package as proposed also suffers from Washington’s typical class warfareism.  Why exclude those with incomes above $87,000/$174,000 altogether? Why phase out the relief for those above $75,000/$150,000?  If the justification for including those with income but no tax liability is to get money into the economy (after all, in that case it’s a cash handout, not a tax rebate), there is no justification for excluding higher incomes.  A family with two professionals earning $178,000 puts money into the economy just as much as one earning $149,000.  The political reality is we can’t ever be seen as “benefiting the rich,” even though they pay the vast majority of all federal taxes (and yes, this is true even if you include FICA).  And we can’t ever be seen as not helping the poor, even if they pay no taxes.  So we end up with a stimulus package that stimulates less, just so we can say we’ve appropriately soaked the rich.

Again, while anything that takes money out of the government’s greedy mitts and returns it to the people is a Good Thing, a tax cut would be better.

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