A one-time tax rebate is at the heart of an economic stimulus package being negotiated by House leaders and Treasury Secretary Henry Paulson on Wednesday … The tax rebate would be similar to the $300 to $600 checks that were sent out in the summer of 2001.While there is bipartisan agreement that a stimulus package should be moved quickly, Democrats and Republicans still disagree on who should receive the rebates.
As the politicians iron out their differences, let’s think about this from an economic perspective.
Those who preach the Life Cycle Model (LCM) would tell us that that one-time rebates will be mostly saved with very little aggregate demand stimulus. In other words, a big impact on the current deficit but little impact on consumption demand just when we likely need it.
There is a possible rebuttal to this LCM view that goes like this. Lower income households are likely liquidity constrained so a tax rebate is sort of like the loan they could not get from the bank. So if we target this temporary tax relief to lower income types, then maybe we will get a strong bang for the buck.
But back to the politics where it has been standard operating procedure for the GOP to shift taxes onto the young by giving most of the tax breaks to rich older dudes. And these rich older dudes are not likely to be so liquidity constrained, which means the LCM view likely is valid if we let the GOP have its way. But isn’t this the real problem with the use of fiscal policy – partisan agendas tend to trump what most reasonable economists would consider the most effective means of handling our economic issues.