Revised January 29, 2008
AN ANALYSIS OF THE REBATE PROPOSAL
IN THE ANNOUNCED STIMULUS DEAL
By Aviva Aron-Dine
The centerpiece of the stimulus deal announced yesterday by House Speaker Nancy Pelosi, House Minority Leader John Boehner, and Treasury Secretary Henry Paulson is a proposal to send rebate checks to 117 million U.S. households.
The structure of the proposed rebate, while not ideal from a stimulus standpoint, is far superior to the structure of the rebate proposal that the Administration developed last week. Where the President’s proposal would have left out approximately 26 million low- and moderate-income working households,[1] the rebate proposal included in the compromise package would reach almost all of these households.
The principal weakness of the new rebate design is that it would provide smaller rebates to low- and moderate-income working families than to families at higher income levels, despite the fact that rebates provided to low- and moderate-income families are the most effective as stimulus. It also may be noted that the proposal does not cover the 22 million mostly low-income households who do not file income tax returns. It is nearly impossibly to reach such households through a tax rebate, but millions of these households could have been reached through a temporary increase in food stamp benefits. The food stamp provision, however, was dropped from the stimulus package.
This analysis first explains the rebate proposal included in the announced stimulus deal and then compares it with the Administration’s earlier proposal.
How the Proposed Rebate Would Work
The proposed rebate would be paid as follows.
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The rebates would be phased out for couples with incomes above $150,000 and individuals with incomes above $75,000. For each dollar in income above those levels, filers would lose five cents of the rebate (i.e. it would phase out at a 5 percent rate).
For example, a married couple with two children and earnings between $3,000 and about $30,000 would receive a rebate of $1,200.[3] Above that income level, the couple would begin to benefit from the portion of the rebate available only to those with income tax liability, and at an income level of about $36,000 it would be eligible for a full rebate of $1,800. At an income level of $150,000, this rebate would begin to phase down and would be fully phased out at an income level of $186,000.
Table 1 shows how much the rebate would be worth for various sample families.[4]
Table 1:
Value of the Rebate for Families at Various Income Levels |
|
Income/Earnings Level |
|
$15,000 |
$50,000 |
$100,000 |
$200,0000 |
Single individual, no children |
$300 |
$600 |
$0 |
$0 |
Single parent, one child |
$600 |
$900 |
$0 |
$0 |
Single parent, two children |
$900 |
$1,200 |
$0 |
$0 |
Married couple, no children |
$600 |
$1,200 |
$1,200 |
$0 |
Married couple, one child |
$900 |
$1,500 |
$1,500 |
$0 |
Married couple, two children |
$1,200 |
$1,800 |
$1,800 |
$0 |
Source: CBPP estimates. |
Comparing This Proposal with the Administration’s
The rebate proposal included in the announced stimulus deal would provide a sizeable rebate to all income tax filers with earnings of at least $3,000. In contrast, as Table 2 shows, households would not have begun to benefit from the Administration’s proposed rebate until their income reached much higher levels. The Administration had suggested that the rebate be provided by reducing the 10 percent tax rate to zero. To benefit from such a change at all, a married couple with two children would need an income of about $25,000. Moreover, such a family would receive only a relatively modest rebate until its income climbed well above $25,000.
For example, under the rebate proposal in the compromise package, a low-income couple with two children and with earnings of $3,000 or more would be eligible for a rebate of $1,200. To receive a rebate this large under the President’s proposal, the couple would need an income of at least $36,900.
Compared with the Administration's proposal, the rebate included in the stimulus deal thus would reach many more low- and moderate-income working households. Of the approximately 26 million low- and moderate-income working households left out by the Administration’s proposal, all but a few million would receive a rebate under this approach.
Table 2:
Income Levels Needed to Benefit |
|
From the Rebate in the Compromise Deal |
From the Administration’s Proposal |
Single individual, no children |
$3,000 |
|
$8,950 |
|
Single parent, one child |
$3,000 |
|
$22,630 |
|
Single parent, two children |
$3,000 |
|
$28,030 |
|
Married couple, no children |
$3,000 |
|
$17,900 |
|
Married couple, one child |
$3,000 |
|
$21,400 |
|
Married couple, two children |
$3,000 |
|
$25,190 |
|
Source: CBPP estimates |
The deal announced yesterday also would target a far larger share of the rebate’s total value to low- and moderate-income families. The Administration’s proposal would direct only 11 percent of the rebate’s value to the 42 percent of households with incomes below $30,000, according to estimates by the Tax Policy Center. In contrast, 23 percent of the value of the rebate in the compromise package would go to these households. According to Joint Tax Committee figures, at least $34 billion of the rebate would be paid to households with incomes too low to owe income taxes.
This is important not only because low- and moderate-income families are among those struggling the most in the weakening economy, but also because rebates targeted to them have the greatest stimulus impact. As Federal Reserve Chair Ben Bernanke recently testified before the House Budget Committee, “If you’re somebody who has lots of financial assets and you receive an extra dollar, you may not change your spending much… If you’re somebody who lives paycheck to paycheck, you’re more likely to spend that extra dollar.”[5] Because low- and moderate-income households will quickly spend most or all of whatever rebates they receive, funds targeted to them provide the greatest economic boost.
In addition, the rebate included in the compromise package would be phased out for higher-income households. Since those households are unlikely to spend their rebates quickly, the phase-out increases the “bang for the buck” that the rebate delivers in terms of providing effective stimulus to the economy.
Stimulus Deal Falls Short in Other Respects
The rebate included in the deal announced yesterday could nevertheless be better targeted. Working-poor families with incomes too low to owe income tax would receive smaller rebates than families at higher income levels. Yet it is funds provided to low- and moderate-income families that do the most to stimulate the economy (as well as to alleviate hardship).
The stimulus deal also missed the opportunity to reach some of the millions of households who will be left out of any tax rebate that is based on income tax returns. About 22 million mostly low-income households (including most low-income seniors) do not file income tax returns. Millions of these households — including many poor seniors and poor families with children — could have been reached through measures such as a temporary increase in food stamp benefits. That provision was dropped from the final package even though respected analysts rate it as one of the most effective forms of economic stimulus that Congress can provide.
[4] These filers, and the married couple described above, are assumed to have only earned income, to claim the standard deduction, and to claim no tax credits besides the Earned Income Tax Credit and the Child Tax Credit. Households that itemize deductions or claim additional nonrefundable credits (such as the dependent care credit or education credits) would need even higher incomes to qualify for the additional rebates available to those with income tax liability.
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