Uncle Sam Wants You to Spend Your Rebate

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You may have already gotten the letter.

"We are pleased to inform you that the United States Congress passed and President George W. Bush signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001, which provides long-term tax relief for all Americans who pay taxes."

"The new tax law provides immediate tax relief in 2001 and long-term tax relief for years to come."

"As part of the immediate tax relief, you will be receiving a check in the amount of $XXX during the week of XX/XX/01."

That's not Ed McMahon talking — that's the IRS, feeling pretty pleased with itself to be able to send out such a cheery letter to some 91 million taxpayers who paid income taxes in 2000. (Some Democrats have complained the letter's a little too cheery.) The rebates — officially known as "advance payments" on folks' 2000 returns, are the refunds created by the new bottom tax bracket of 10 percent, effective retroactively to the beginning of the year.

In other words, the first $6,000 of a single taxpayer's income ($12,000 for couples filing jointly) is now taxed at 10 percent instead of 15 percent, and everyone who coughed up will get a payment in the amount of 5 percent of their taxable income for the year 2000 — or $300 ($600 for couples, $500 for single parents), whichever is higher.

Yes, that's right — not everybody's getting $300 or $500 or $600. That's as much as you can get, but not as little. About 30 million low-income Americans didn't have to pay income taxes at all (payroll taxes don't count), so they won't get a dime. Some in the lower range will get less than the maximum. And some — statistically, a more Republican group than the whole — will get the maximum.

When you get it, meanwhile, depends on the last two digits of your Social Security number — checks for 00-09 get mailed out Friday; 10-19 gets theirs sent July 27, and so on until checks for 90-99 are mailed out September 21. (Allow 2-3 weeks for delivery.) It's all in the letter.

Open your wallets

Whenever it arrives and however much it is when it does, it isn't a heck of a lot — but it's something. All together, it adds up to about $40 billion getting put back into the economy, $40 billion of what the White House is calling "economic stimulus." They're counting on the money to not only make people feel good about Republicans, but to help the economy make it though a long summer without slipping into recession.

And that's also supposed to boost tax receipts sooner (think of the IRS as investing in you) and put the budget surpluses back somewhere near where it was supposed to be. But it all depends — what are you gonna do with yours?

Alright, everyone get out there and shop

The Bush team spent their time on the Sunday shows essentially calling for a mass national shopping spree, and some of them are even following their own advice.

Chief economic adviser Larry Lindsey says he's buying bikes for his kids. Karl Rove will blow it on school clothes, home furnishings "and something for Daisy, the dog." Budget director Mitch Daniels will give it to his daughter to save — "but she may find a way to spend it," he says hopefully. Multimillionaire Donald Rumsfeld is opting for services — he says he'll use it to pay his accountant. And Treasury Secretary Paul O'Neill, who's signing the checks, is giving it to charity.

But the timing may not be perfect. Look at what's happening with the energy policy. Just as gas prices are falling like a stone — 30 cents since mid-May — the White House sends out its energy-plan salesmen. And just as the rebate checks are going out, the American people may not be in the mood to play along with the Administration's hopes for quick and conspicuous consumption of the tax rebate. In a USA Today/CNN/Gallup poll released Monday, only 17 percent plan to spend the money. Some 47 percent say they'll pay off bills, 32 percent will save or invest it, 2 percent say they'll donate it to charity and 2 percent just can't imagine what they'll do with all that moolah.

Give to your local GDP

Well, for starters, here's the economic state of things headed into August. The economy spent the second quarter very near zero GDP growth, if not at zero or below. (O'Neill insists we're still in positive territory.) It won't get much help from businesses — Wall Street is flat, and will be for months at least, because most businesses are still recovering from those heady cash-burning days of the late '90s and are cutting costs as fast as they can. They're still selling off old inventories, which means they're cutting production (and workers, most companies' biggest expense) as fast and as deep as they can.

Which means continuing economic growth is almost entirely up to the consumer. Consumer spending is two-thirds of GDP, and for GDP growth to stay above water the consumer has to keep spending like nothing's wrong. But something is wrong — unemployment, thanks to those layoffs, is steadily on the rise and could go to 5 percent before this is all over with, and who wants to keep spending if their job is in danger?

They've done it so far. Consumers and their spending (led recently by auto sales) have remained surprisingly upbeat throughout this slowdown, and so far it looks like the almighty American shopper will be successful in keeping the U.S. out of a recession. But economists are starting to worry about "the consumer collapse," in which unemployment finally gets too scary for Americans to go on like they have and not tighten their belts just a little.

The tax rebate is supposed to delay that day of reckoning just long enough for Corporate America to shake off their excess inventories and start ramping up production again, followed by the long-awaited rebirth of capital investment in expansion, new equipment or in other companies. Alan Greenspan's six-and-counting interest-rate cuts will presumably help that along, but most forecasts see another six months before businesses really get their sea legs back.

Spend or save: does it really matter?

That's where the $300 comes in, or so the plan goes. Consumers bank the dough and immediately head out to stores, buying goods and services that put that $40 billion to work. Third-quarter (that's July to September) GDP growth registers an extra half-point or more, keeping the recession at bay, and George W. Bush comes off looking like his tax cut just saved the world.

But what if the polls are right — what if nobody feels rich enough to go to the mall? Well, the multiplier effect of say, sticking it under the mattress is darn near zero, and that wouldn't do much good. But some economists think what you do with the money isn't nearly as important as the feeling you get when it's sitting in your wallet.

After all, this is America we're talking about — we raise our children to shop. And if Mr. And Mrs. Smith use that $600 to do something ant-ish like put it in the bank, invest it, or pay off credit card bills (generally a better deal than investing anyway), won't the money find its way out eventually? Admit it — savings is fleeting, investments make somebody else feel rich enough to spend, and credit card bills that go down by $600 tend to go back up by $800 before long. We're all grasshoppers at heart — that's how we kept this 10-year economic expansion running this long.

The Bush Administration would still prefer that you head directly to the store — it's faster that way, and there are Republican political careers riding on this tax cut working out for the best. Stores would certainly prefer that you spend it with them — Wal-Mart, for one, is offering a rebate-check cashing service right on premises.

"Seriously, no purchase is necessary," said Wal-Mart spokesman Tom Williams. "We're happy to have people come in our stores, to cash them and leave — but we'd love them to spend some of the money, too."

That's about how George W. Bush, Alan Greenspan and everyone in Washington or out who would like to see the U.S. keep the good times going another ten years. Economically, the checks may be coming along at the right time — while consumers are apparently still confident enough to spend the things. The trick will be to get them into mailboxes and back out into the marketplace before one of two things start to scare people: the unemployment rate, which is going nowhere but up, and the stock market, which is going nowhere at all. Hopefully by winter, Greenspan's cuts will kick in and business will feel ready to pitch in with some multiplier-ready dollars of their own.

Till then, it's up to you. The nation needs your $40 billion swirling around the marketplace, but don't do it out of patriotism — we don't want you feeling broke and used in November, either. Advice from your economist? First get your letter and do a little planning; then use the rebate — whatever it is — to make yourself feel richer. The rest will take care of itself.