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Budget and Tax Cuts Debate

Booster Shot? As tax rebate checks arrive, economists assess the potential effects on the economy. (7/27/01)

Shrinking Surplus: Kwame Holman details today's hearing on the shrinking projections for this year's budget surplus. (7/12/01)

President Bush signs a $1.35 trillion tax cut. (6/7/01)

Consumer Confidence: Paul Solman explores what consumer confidence numbers mean, and why they matter. (5/29/01)

Feeling the Tax Cut: What the tax cut will mean for most Americans. (5/28/01)

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Alan Greenspan: Chairman of the Federal Reserve, the most powerful man you've never heard of. (12/20/00)

Economic Good Times: America sets the record for a economic expansion. (2/7/00)

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Free money from the gov't
August 1, 2001

Sometime during this summer or early fall, your family may receive a check in the mail from the federal government. And although you probably won't see your name on the "pay to" line, you may still feel the check's effects.

The checks are part of the 2001 tax law President Bush signed in early June that is supposed to help the economy by making people spend more. That law directed the Treasury Department to send out certain amounts of money called tax rebates to taxpayers across the country.

So what led to this massive government payout?

Stimulating the Economy

When President Bush was running for president last year, one of his campaign promises was to cut federal taxes. He said the government was spending too much money on programs to help the poor and wanted to lower the percentage of people's paychecks the government took in taxes.

Last year, economists said the federal government collected more money in taxes than expected to pay for government programs. The increase came from very strong economic growth: people and companies made more money and paid more in taxes - so the government profited.

The rosy forecast changed this year when the economy started to slow down. Corporations are making less revenue and therefore the government is collecting less taxes from them. The economy slowdown has a lot of politicians worried and so a plan was needed to stimulate both spending and investment.

Both Democrats and Republicans in Congress had very different ideas, but the Republican plan won out since they had a majority in both the House and Senate at the time. (They'd lose the Senate to the Democrats in June.)

Over Memorial Day weekend, Congress passed the plan, called the "Economic Growth and Tax Relief Reconciliation Act of 2001," and President Bush signed it soon after.

Money from Uncle Sam

The 400-page bill reduces the amount of money the government will collect in taxes by $1.35 trillion over the next 11 years. Because of that change, the amount of taxes people will pay each year will drop, which will allow them to save more money for retirement. The plan also eliminates the estate tax, which affects mostly wealthy families who pass on property and money from one generation to the next.

One of the most controversial aspects of the tax law is a plan to send checks to 95 million people who filed tax returns earlier this year. Due to a change in tax laws that will take effect in 2002, the government is sending advanced payments this year to refund part of next year's taxes. Those advanced payments are referred to as tax rebates.

The rebates range from $300 - $600 depending on whether someone is single, married, or the head of a household. The total cost of these rebates will be around $38 billion dollars.

Not everyone who worked and paid taxes will get rebates, including most teens with part-time or full-time jobs. The law requires that people had to earn a certain amount of money to receive rebates along with many other restrictions.

But most teens won't get checks because they're listed as "dependents" on their parents' or guardians' tax returns. Many teens' parents or guardians provide food and shelter for them and receive special financial benefits by stating on their yearly tax forms that they have dependents to take care of. According to the bill, anyone considered a dependent by another taxpayer won't receive a rebate.

Pros and Cons

Supporters of the bill say that if people are paying less in taxes, they will spend more money on goods and services, which will help the economy grow. Overall, if the economy is doing well, the quality of people's lives improves.

Opponents of the plan are worried the government needs the money it's giving back to taxpayers to increase spending on education, lessen the costs of prescription drugs for senior citizens who use the Medicare program and provide for other social services. They think the economy will improve on its own over time and that by cutting taxes, the government could run into financial trouble in future years.

A poll by the Gallup organization recently asked around 1,000 adults how they would spend their rebate checks. Seventeen percent said they would spend the money, while 47 percent said they'd use the cash to pay off bills. Thirty-two percent plan to save or invest it.

Only two percent said they would give the money to a charity organization, like their church, synagogue or the United Way. Since the rebates were announced, various Web sites have sprung up allowing people to donate money to the government or to other special groups.

Meanwhile, businesses like Home Depot and Wal-Mart have begun ad campaigns to convince people to use their rebate checks on items they wanted, but couldn't afford before.

Not the First Time

The only other time in U.S. history when the government sent taxpayers rebate checks was during President Ford's administration. During his January 1975 State of the Union address, President Ford declared the state of the national economy wasn't very good. Congress passed a tax bill later that year cutting billions from the budget and gave many taxpayers a rebate check between $100 to $200.

At the time, the economy was in a deep recession - a period of unemployment and negative economic growth - and many people didn't spend the rebates that year. Most people saved it or used it to pay down debt instead. The economy didn't dramatically improve until the early 1980s and after another tax cut, signed into law by President Reagan.

The Reagan tax cut and another large cut signed by President Kennedy in the 1960s are often cited as examples of successful tax reduction programs, because both were followed by economic expansion and an increase in new jobs.

Since the U.S. economy is very complex, it's hard to predict how successful this tax cut plan will be both in the immediate future and in years to come. However, many taxpayers now have little extra money - perhaps to buy a little more fun or a little less worry.

What do you think? Should the government spend the extra budget money on more programs to help people or send it back to the taxpayers instead?