Rebating what and why?

As the Federal Reserve puts the stability of the US dollar at risk with an overreaction to a stock market dip, politicians in Washington are touting a “fiscal stimulus” package to help pull the country out of a decline in the rate of economic growth. This is beyond the wildest dreams of John Maynard Keynes. Or perhaps even a nightmare he’d share with classical economists.

A good tax cut package would, as I’ve noted before, be a great pro-growth policy and properly done a non-inflationary, productivity increasing and revenue enhancing one. If market hysteria and a desire to out-Keynes Keynes and out-helicopter Helicopter Ben could bring that about, great. But it’s looking more like an extra round of ill-advised pork barrel spending and “tax rebate” checks are the plan.

The question is “What are they rebating?”

The politicians seemingly want to duplicate the apparent success of the 2001 tax rebate checks. (Of course, the chance to send a check to every voter in your district in an election year is too good for Congress to pass up, even if it means sleeping with George Bush and Dick Cheney.) The big problem with this thinking is that those rebates were just the front end of the extensive Bush tax cut package. That package did two major things to build confidence for both investors and consumers. It provided tax relief to literally everyone who paid any federal income taxes at all, from the top to the bottom. Second, it lowered marginal rates: a pro-growth, anti-inflation, revenue enhancing policy. The combination gave taxpayers the confidence to spend or invest the $500 rebate checks and a whole lot more.

A rebate that leaves taxpayers asking “Where’s this coming from?” and “How will we pay for it?” is not such a confidence builder. It may lead to a small spending spurt, probably less than 100% of the checks cut. It won’t do much to fundamentally affect consumer or investor behavior as the dollar’s erosion against the euro accelerates (Who’d have expected the Europeans to become sound money fanatics just when the Fed loses its collective mind?) and we suffer the consequences in the price of imports, especially energy imports.

If the President really wants to do something worth doing, he should take a look at Giuliani’s tax plan or even consider a payroll tax cut that would put money in consumer pockets and supercharge the small business engine. Rebates with no rhyme or reason are not the solution to this non-problem.

[tags]tax rebates,economy,inflation,Federal Reserve[/tags]

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