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Can tax rebates really prevent an economic downturn?


How is a tax rebate plan implemented?

How Much Will You Get?

If you're eligible for one, your 2008 tax rebate will arrive during the spring or summer after you file your 2007 tax return. Here's a look at how much rebates will be [s­ource: Sahadi].

WhoHow Much
Single person with adjusted gross income less than $75,000
Up to $600, plus $300 for every child under 17


Couples with adjusted gross income less than $150,000

Up to $1,200, plus $300 for every child under 17

People with at least $3,000 in income (or in Social Security or veteran's benefits) but owe nothing in taxes
$300 per person or
$600 per couple

People with adjusted gross incomes above the caps (single: $75,000; joint: $150,000)

Subtract from the rebate 5 percent of how much you earn above the cap

If you're still unsure of your rebate, use this tax rebate calculator from Kiplinger.com to figure it out.

Now that we know how tax rebates theoretically prevent economic downturns, let's find out how they are implemented. It may be surprising that opposing political parties can suddenly and overwhelmingly agree on something, but politicians can pass tax rebate plans quickly for a few reasons. Often, speed is necessary for the plan to work, considering the time it takes to get money to individuals. Lawmakers want people to start spending before economists can state with certainty that the nation is stuck in recession (which will cause people to hold on to their money). In addition, congressmen want to win over voters by approving bills that combat economic problems. Failing to go along with the plan might turn off voters [source: Neikirk].

For the tax rebates to work, economists say the "three T's" must fall in line. The plan should be:

  • Timely
  • Targeted
  • Temporary

The plan will have the best chance of succeeding if it comes at the right time before recession; is given to people who will spend it and doesn't have a long-term negative effect on the government [source: The Economist].

It may take as little as two to three months for rebates to arrive in mailboxes after Congress approves an economic stimulus package [source: Neikirk]. The amount you get depends on the particular plan passed. For the plan to work, Congress hopes that as many people as possible spend their money quickly.

Does that really happen? Or are people inclined to put it right back in the bank? It depends on your expectations of the economy. For instance, if you are afraid of losing your job in an impending recession, you might keep your money in savings. However, if you feel secure about your employment and the future of the economy (perhaps as a result of the tax rebate plan, itself), you might be inclined to spend it. To this extent, public perception is reality when it comes to the economy. For the rebates that were given out in the U.S. in 2001, about two-thirds were spent within six months [source: Johnson]. Those rebates may have helped to keep that recession at bay [source: Hill].

Not everyone buys this theory, however. Some argue that the 2001 rebates didn't do much to relieve the recession [source: Reidl]. Next, we'll find out why skeptics don't like the idea of tax rebates as an antidote to recession.

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