Like HowStuffWorks on Facebook!

Can tax rebates really prevent an economic downturn?


Criticism of Tax Rebate Plans

Learning to Repeat Past Mistakes
Political commentator Glenn Beck toys with the idea of issuing pre-paid debit cards rather than tax rebate checks. He points out that though this process proved disastrous when victims of Hurricane Katrina chose to use them on frivolous items, that same frivolous mind-set might help pump cash into the economy now. Another benefit: By putting an expiration date on the cards, people will have to spend them more quickly than they would a check or miss their opportunity.
[Source: Beck]

So can tax rebates help to prevent a recession? Not necessarily. Many economists and political commentators think they merely delay an inevitable recession or even hurt countries in the long run. Here's a rundown of some objections:

  • The rebate boost might act as a temporary delay for a downturn, like a pain reliever that wears off after a few hours. If individuals do spend their check quickly, a sudden increase in demand will shoot up and fade out, putting the economy back where it started and adding to the national debt (and the burden on future taxpayers).

  • Even if consumers quickly blow their newfound money, the actual items people purchase might be foreign products, which wouldn't help the U.S. economy as much.

  • It might be too difficult to time the rebates appropriately. The 2008 package may come too late to prevent a recession.

  • Times are more troubled than they were in 2001 when a similar tax rebate measure passed. Economist Michael Niemira told the Wall Street Journal that debt has gotten so bad people will want to use their rebate check to pay off debt rather than consume more things [source: Waters].

  • Tax rebates encourage spending rather than saving or investments, according to Brian Riedl of The Heritage Foundation. Riedl argues that cutting taxes to create jobs, incentives to work and investments could help the economy more significantly.

Overall, many agree that tax rebates provide at least temporary help and work best in conjunction with other fiscal and monetary policies that can help to prevent or relieve a recession. To learn more about personal finance and taxes, visit the links on the next page.