Congress enacted the tax rebate program earlier this year because it perceived a growing risk of recession. Supporters reasoned that the program would boost consumer confidence as well as available cash. They hoped the combination would cause households to spend a substantial fraction of the rebate dollars, leading to more production and employment, according to Martin Feldstein, a professor at Harvard University.
The evidence is now in:
* Recent government statistics show that only between 10 percent and 20 percent of the rebate dollars were spent.
* The rebates added nearly $80 billion to the permanent national debt but less than $20 billion to consumer spending.
This experience confirms earlier studies showing that one-time tax rebates are not a cost-effective way to increase economic activity, says Feldstein.
These conclusions are significant for evaluating the likely impact of Barack Obama's recent proposal to distribute $1,000 rebate checks to low- and middle-income workers at an estimated cost of approximately $65 billion. His plan, to finance those rebates with an extra tax on oil companies, would reduce investment in refining and exploration, keeping oil prices higher than they would otherwise be, says Feldstein.
Here are the facts:
* Tax rebates of $78 billion arrived in the second quarter of the year.
* The government's recent gross domestic product (GDP) figures show that the level of consumer outlays only rose by an extra $12 billion, or 15percent of the lost revenue.
* The rest went into savings, including the paydown of debt.
All of the evidence on one-time tax rebates implies that the Obama plan to send $1,000 rebate checks would do little to raise consumer spending and stop the decline in employment. If the past is an indicator of what would happen, the $65 billion he proposes to spend on this plan would raise consumer spending by only about $10 billion, or less than one-tenth of 1 percent of GDP, says Feldstein.
Source: Martin Feldstein, "The Tax Rebate Was a Flop. Obama's Stimulus Plan Won't Work Either." Wall Street Journal, August 6, 2008.
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