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Booster Shot or Bandage?

By Christina Alabi

An analysis on the H.R. 5140 economic stimulus package

I. Introduction

According to a recent Associated Press-Ipos economic study, 61 percent of Americans believe the economy is in a recession. [1] Yet, some individuals are optimistic of the direction of the economy. In the Treasury Economic Update on February 1st, Assistant Secretary of the Treasury for Economic Policy, Phillip Swagel said ?recent data indicate[s] that economic growth and the pace of job creation have slowed. At the same time, the unemployment rate remains low and core inflation is contained. We expect that the economy will continue to expand, even as the housing downturn and credit market strains remain a drag on growth.? [2]

 

II. The Economic Stimulus Package

?Rapid enactment of the bipartisan growth package passed by the House of Representatives would provide important support for the economy this year,? according to Assistant Secretary Swagel. [3] In an effort to combat this potential dilemma, on February 7th, 2008 Congress passed H.R. 5140, Economic Stimulus Act of 2008, which is stimulus package. [4] The legislative intent is to increase economic activity with this package. [5] President Bush approved the bill declaring it to be a ?booster shot for the economy.? [6] President Bush stated the bill ?is large enough to have an impact, amounting to more than $152 billion this year, or about 1 percent of the gross domestic product (GDP).? [7]

        A. Goals of H.R. 5140

The Congressional Budget Office defines the primary goal of this fiscal stimulus as boosting economic activity during periods of economic weakness, by increasing short-term aggregate demand. [8] Aggregate demand is the total amount of goods and services demanded in the economy in a given period, by consumers and producers. [9] The Congressional Budget Office and the Joint Committee on Taxation (JCT) estimate that H.R. 5140 would:
        1) Decrease revenues by $114 billion in 2008 and by a net amount of $82 billion over the 2008-2018         period; and
        2) Increase direct spending by $38 billion in 2008 and $42 billion over the 2008-2009 period. [10]
In total, those changes would increase budget deficits (or reduce future surpluses) by $152 billion in 2008 and by a net amount of $124 billion over the 2008-2018 period. [11]

        B. Benefits to Individuals

The H.R. 5140 would also provide a tax rebate to individual tax filers who satisfy specific income requirements. [12] In addition, the Act would raise the loan limit for the Federal Housing Administration?s (FHA?s) single-family program. [13]

Under the plan, individuals with an adjusted gross income of more than $3,000, or married taxpayers filing joint returns, with an adjusted gross income of more than $6,000 are both eligible for a rebate check. [14] The rebate amounts to $600 for most individual taxpayers and $1,200 to married couples, so long as they are below income caps of $75,000 for individuals and $150,000 for couples. [15] If taxpayers earned more than their respective limits, they qualify for a partial rebate, depending on how much their income exceeds the caps. [16]

The economic stimulus package also includes a $300 per-child tax credit. [17] Every taxpayer with a child under the age of 17 who resided with them for more than half of the 2007 year qualifies for a rebate of $300 per child. [18] Workers who do not earn enough to pay income taxes but have earned income of at least $3,000 are also eligible, as well as 20 million seniors living on Social Security and about 250,000 disabled veterans. Rebate checks will also be distributed to survivors of disabled veterans. [19]

        C. Benefits to Businesses

The Act also includes two provisions that would enable businesses to take additional deductions for accelerated depreciation and immediate expensing of capital purchases. [20] The first such provision would allow a business to partially expense an additional 50 percent of its investment in certain equipment made in tax year 2008. [21] In subsequent years, the remaining value of the property would be subject to depreciation rules under current law. [22]

The second business tax provision would increase deductions allowed under section 179 of the Internal Revenue Code for the cost of purchasing certain types of property. [23] Under current law, a business is permitted to deduct from taxable income up to $128,000 of the cost of certain types of property purchased in tax year 2008 rather than spreading that deduction out over future years through depreciation expenses. [24]

III. Will A Tax Rebate Restore the Economy?

Is the economic stimulus bill a positive resolution towards improving the slow growth of the economy?  This depends on how this question is asked, and to whom.

Proponents of the plan believe it will revive the economy and a plan like this is justified. [25] Author Robert Kuttner states this is no ordinary cyclical recession. [26] Rather, he describes it as a sharp and needless economic contraction, caused by a serious blow to the financial system, which was the result of deregulation. [27] United States Treasury Secretary Henry Paulson congratulated the Senate leaders for their quick action to pass a bipartisan economic growth package. [28] Treasury Secretary Paulson feels that H.R. 5140 is ?temporary, broad-based, and will get money into our economy quickly. [29] This package of payments to individuals and incentives for businesses to invest will support our economy as we weather the housing downturn.? [30]

IV. Minimal Impact

Although Congress approved the H.R. 5140 with rapid speed, the bill did not receive widespread support from Americans. Republican Senator Jeff Sessions of Alabama, voted against the stimulus package, stating he did not feel it was good for America. [31] He referred to the plan as a ?political stimulus package? [rather] than a real package that would impact our economy in any significant way.? [32] Furthermore, he opposed the idea of adding billions of dollars to the federal debt which has declined over the past three years. [33] Columnist Rich Tucker of Townhall.com was also unimpressed with the package, stating ?we?re borrowing money from future taxpayers and giving it to Americans to spend today.? [34] Many observers forecast worry that the package will result in a ?W? shaped, or double-dip, recession, where the aggregate demand will improve only temporarily and then decrease again. [35]

V. Predictions for the Future

Treasury Secretary Paulson says ?payments will be largely completed this summer, putting cash in the hands of millions of Americans at a time when our economy is experiencing slower growth.? [36] However, in order for this plan to succeed, recipients of this rebate will need to adhere to the principles and purposes of the bill. Whether people actually spend the money remains to be seen. A recent Associated Press-Ipos poll indicates most people plan to use this money in other ways than immediate spending back into the economy. [37] 45 percent of respondents said they planned to pay off bills, while 32 percent said they would save or invest it. [38] Merely19 percent said they would spend their rebates. [39] The remaining 4 percent said they would donate to charity. [40]

The package alone will not single-handedly turn the economy around, but it may be a step towards a positive direction. The economy has responded in various ways to previous packages, but only time will tell what effects H.R. 5140 will have on the future of our economy. This may be the booster shot that Americans need to boost the economy. On the other hand, it may be a temporary bandage with minimal economic restoration effects.

Endnotes:

[1] Economy Study, The Associated Press Poll Conducted by Ipsos Public Affairs, http://www.usatoday.com/money/economy/2008-02-08-stimulus-ap-poll_N.htm [hereinafter Economy Study]

[2] Treasury Economic Update (Feb. 1, 2008), http://www.ustreas.gov/press/releases/hp800.htm

[3] Id.

[4] Congressional Budget Office, HR 5140, Economic Stimulus Act of 2008 (2008), http://www.cbo.gov/ftpdocs/89xx/doc8973/hr5140pgo.pdf [hereinafter HR 5140]

[5] David M. Herszenhorn, Congress Votes for a Stimulus of $168 Billion, N.Y. Times, Feb. 8, 2008, available at http://www.nytimes.com/2008/02/08/washington/08fiscal.html

[6] Adam Levine, Bush Signs Stimulus Bill; Rebate Checks Expected In May, CNN, Feb. 13, 2008, http://www.cnn.com/2008/POLITICS/02/13/bush.stimulus/?iref=mpstoryview

[7] Id.

[8] Herszenhorn, supra note 5.

[9] AllBusiness.com, Aggregate Demand Definition, http://www.allbusiness.com/glossaries/aggregate-demand/4948948-1.html (last visited Feb. 24, 2008).

[10] HR 5140, supra note 4.

[11] Id.

[12] Id.

[13] Id.

[14] What Does the Tax Rebate Mean For You? Feb. 11, 2008, http://www.abc27.com/news/stories/0208/494974.html [hereinafter Tax Rebate]

[15] HR 5140, supra note 4.

[16] Tax Rebate supra note 14.

[17] Levine, supra note 6.

[18] Tax Rebate supra note 14.

[19] Id.

[20] HR 5140 supra note 4.

[21] Id.

[22] Id.

[23] Id.

[24] Id.

[25] Robert Kuttner, The Economic Recovery Plan America Needs, Feb. 15, 2008, http://www.alternet.org/democracy/76707/

[26] Id.

[27] Id.

[28] Statement on The Senate Passage of the Economic Growth Package by Henry Paulson, U.S. Treasury Secretary (Feb. 7, 2008), http://www.ustreas.gov/press/releases/hp815.htm [hereinafter Statement]

[29] Id.

[30] Id.

[31] Jim Brown, Sen. Sessions: More 'Political' Stimulus Than Economic, Feb. 15, 2008, http://www.onenewsnow.com/Politics/Default.aspx?id=67385

[32] Id.

[33] Id.

[34] Rich Tucker, Smarter Steps to Stimulate the Economy (Feb. 15, 2008), http://www.townhall.com/Columnists/RichTucker/2008/02/15/smarter_steps_to_stimulate_the_economy

[35] A Stimulating Notion, Economist, (Feb. 14, 2008), http://www.economist.com/displaystory.cfm?story_id=10697166

[36] Statement supra note 28.

[37] Economy Study supra note 1.

[38] Id.

[39] Id.

[40] Id.

Full post as published by The Journal of the Business Law Society on February 25, 2008 (boomark / email).