A little economic humor for the holidays…
Between April and December of 2008, about 120 million individuals in the United States received one-time stimulus payments totaling $96 billion. Those payments began phasing out at incomes above $75,000 a year, in part because it was argued that lower-income households were more likely to spend their rebates, so policies aimed at those households would be more likely to have stimulative effects.
In Household Response to the 2008 Tax Rebate: Survey Evidence and Aggregate Implications (NBER Working Paper No. 15421), co-authors Claudia Sahm, Matthew Shapiro, and Joel Slemrod find that the proportion that people say they spent was up slightly as compared to previous stimulus-induced spending. They estimate that the $96 billion spent on stimulus generated roughly one third that amount, or $32 billion, in extra consumer spending (as compared to 21% spending of previous stimuli).
This study uses data from The Reuters/University of Michigan Survey of Consumers, a nationally representative survey based on 500 telephone interviews a month. The authors compare the results of their analysis to aggregate data on saving, spending, and debt, and to the results from other surveys. They conclude that their results are in accord with these data, and that “absent the rebate, the sharp decline in spending that is evident in aggregate data beginning in the third quarter of 2008 would have started in the second quarter, prior to the financial crisis of the fall.”
Although the authors find that the stimulus program boosted consumer spending, they report that more than three-quarters of the overall survey respondents said that they would save the stimulus payments or use them to pay down debt. Of those under age 30, only 11 percent said they would mostly spend the payments. Of those over age 65, 26 percent said they would mostly spend the payments. These results are similar to those observed for the 2001 tax rebates.
People with incomes over $75,000 — roughly the top third of the income distribution — had “mostly-spend” rates about 7 percent higher than the average mostly-spend rate of lower income groups. For those with stock holdings in excess of $250,000, the mostly-spend rate was almost 40 percent; for those with stock valued between $100,000 and $250,000, that rate was 25 percent; for those with stock holdings between $50,000 and $100,000, the mostly-spend rate was 14 percent; and for those with stock holdings below that level, the mostly-spend rate was roughly 20 percent. These results do not support the conventional wisdom that younger, lower-income households are more likely to spend a one-time tax rebate. They are consistent with the possibility that moderate-stock-wealth households are more inclined to save because, unlike high-stock-wealth households, they have not yet met their savings goals.
The following are some of the major provisions of the stimulus package of interest to small business, according to Small Business Legislative Council, The Associated Press and other sources:
- It allows small businesses to take upfront deductions of up to $250,000 of the cost of equipment — such as computers, vehicles, furniture and manufacturing machinery — instead of depreciating the investment over a number of years. The deduction was slated to end in 2008, but was extended through 2009.
- It extends a bonus depreciation allowing small businesses to deduct half the cost of new qualifying capital equipment expenditures purchased in 2009, if the equipment is put into use by Jan. 1, 2010.
- It temporarily broadens the “carry–back” period for 2008 net operating losses from two years to five. This allows small businesses to apply 2008 losses to past and future tax bills, freeing up capital that can be pumped back into the business.
- It provides all taxpayers with deductions for state and local sales and excise taxes on purchases of new cars, light trucks, recreational vehicles and motorcycles, through 2009.
- It raises the percentage of gain an individual may exclude from taxable income, from the sale of certain small business stock, from 50 to 75 percent.
- It extends a credit businesses may take for electricity produced by wind energy, through 2012, and for electricity produced by other renewable resources, through 2013.
- It includes a temporary 65 percent subsidy for COBRA payments for nine months. Employees would pay the employer the lowered 35 percent of the premium, and employers would take a credit against payroll taxes for the amount of the subsidy.
A summary of the key provisions in the stimulus package is available from the Senate Finance and House Ways and Means committees.
Hat Tip to SAF E-Brief
The House and the Senate have drafted a compromise stimulus bill totalling $789.5B, all but guaranteeing the largest economic rescue program since Roosevelt’s New Deal. Obama hailed the “endeavor of enormous scope and scale,” though it may turn out to be just a down payment on efforts to turn around the economy. The package, which exceeds the cost of the entire Iraq war since the 2003 invasion, will expand unemployment insurance, streamline health-care delivery, give Washington more control over local education spending and tilt federal assistance to the poor. Around 35% of the package is earmarked for tax cuts. Obama and Democratic leaders lowered their expectations for job creation to 3.5M from 4M. Both chambers could approve the compromise bill by the end of the week.
In case you’re wondering where I stand on the proposed proposed gasoline tax holiday, it would save the average individual motorist a grand total of $28 this summer, but would result in $9 billion in lost tax revenues which would be mostly targeted for infrastructure needs. This is a politically motivated move, not a well-thought-out economic decision. Enough said.
Data source: American Association of State Highway and Transportation Officials
Almost two out of every three Americans won’t spend tax rebates included in the proposed government stimulus package, a survey by American Century Investments found. A little more than a quarter of respondents said they would spend the rebate money now, while 36 percent said they would use it to pay off outstanding loans or credit card balances, according to Kansas City-based American Century Investments. Another 25 percent said they would save or invest it.
On the other hand…
According to a new National Retail Federation survey, consumers plan to spend 40.6% of tax rebate checks, which will provide an immediate $42.9 billion boost to the economy. The survey also found that the $105.7 billion distributed in tax rebates will be used to pay down debt ($30 billion), saved ($19.8 billion), invested ($4.4 billion) and used to pay down medical bills ($4.6 billion). Women will spend a larger percentage of their rebate check than men (43.6% vs. 37.3%). And young adults age 18-24 will spend more of their checks (46.2%) than any other age group.
Who is right? Time will tell, but I do know this. There will be some big trees planted in my yard when the check does arrive!
Needless to say, I have been receiving a lot of questions at various meetings on the economic forecast for this year and the prognosis for the Green Industry. I always receive curious looks when I start off saying “It depends on who you’re listening to!” Perhaps the following may help to explain. The Federal Reserve Bank of Philadelphia just released its latest survey of professional forecasters and panelists were divided on when the effects of a government fiscal stimulus package would be apparent and how large the effects would be. Thirteen economists reported an effect beginning in the second quarter and 19 think the effect will begin in the third quarter. Two estimated that the effect won’t begin until the fourth quarter, and the remainder didn’t provide answers. The majority, however, expect the stimulus package to have a welcome but moderate effect on the economy. Almost a quarter said tax rebates would have a significant effect on consumer spending, while just 7% expected investment tax credits to have a major impact on business spending. Some 22% said tax rebates would have an insignificant or no effect, while 38% said investment tax credits would have an insignificant or no effect. Overall, economists in the Philadelphia Fed survey raised expectations for GDP contraction this year, but on average still expect the economy to grow, albeit at a sluggish pace. See what I mean!