Bush Reprises a Tax Rebate--and the Democrats Weigh In

McCain also calls for tax cut--this one in corporate rates and R&D

President Bush has called for a tax rebate as a way to stimulate the economy with fears of recession growing (in a related development, the Fed cut the fed funds rate by 3/4% yesterday to in effect increase the money supply). Although specifics have not yet been announced; a possible amount would be up to $800 for single taxpayers and $1,600 for married filing jointly. The Treasury estimates the "tax expenditure" to be about $140-$150 billion. At a South Carolina debate, the three significant remaining candidates (Clinton, Edwards and Obama) called the Bush proposal unsatisfactory and proposed that at least part of the tax rebate come from payroll taxes to increase the number of low-income Americans who would benefit.

The Bush plan of a tax rebate is better than either a rate cut or a spending program for temporary stimulus--both of these alternatives are likely to become institutionalized and thus continue after their stimulus value had passed. Treasury Secretary Paulson and Bush are probably right to make the cut significant--more for perception than reality, BUT perceptions on recessions frequently become self-fulfilling. At the same time, the Democratic proposal of a payroll tax cut has some merit if consumer spending is the goal. My proposal: a rebate of the first $700/$1400 of total income tax and a up to $100 ($160 if self-employed) rebate per employee on Social Security taxes. On the payroll rebate: self-employed should get a potentially greater rebate because they pay a higher rate. I would also set the rate of rebate at 5%/8% self-employed (for mathematical convenience), start the rebate at FICA earnings of $5000 (the EIC is designed to cover self-employment taxes on very-low income employees--see the single rates) and would recapture the rebate at 50% on earnings over the Social Security ceiling (which I believe that the Wandering Tax Pro listed at $102,400 last week).