The US House approved overwhelmingly today a $146 billion tax rebate stimulus package agreed to as a compromise between democratic… … and republican leaders along with Treasury Secretary Paulson, and President Bush. The Senate will vote on the bill this week.

While there is some concern that party leaders on both sides may look to adjust the bill, many speculate that the pressure to get the proposal through quickly will prevent any hindrances to the process.

In spite of its current focus on the upcoming tax season, it’s believed that if the Senate approves the bill and Bush signs it next week, the IRS could have rebate checks in the mail as soon as mid-May for many of the over 100 million individuals, and 35 million households expected to receive the rebate.

While there are some restrictions tied to the stimulus bill, generally, households making under $150,000, and individuals making less than $75,000, are expected to receive checks worth $600-1200. Families will receive an additional $300 in rebates per child on top of the $1200. Individuals who made at least $3,000 last year will receive $300-600. Essentially, the rebate is intended to put money back into the hands of a large population of taxpayers in hopes that the money will be spent to boost the economy.

Individuals and families over the income thresholds may still receive rebate checks as dollar amounts are scaled back for higher income earners. For every dollar over the income limits, a 5% reduction is taken from the rebate amount until the income level reaches a point where the rebate would be zero.

Amazingly, this bi-partisan package was agreed to quickly in spite of sharp compromises by both democrat and republican leaders. Unemployment extensions, rebates for retired citizens and wealthier taxpayers, and varied rebate amounts were among the topics of contention during discussions.

The stimulus package coincides with the recent .75 point emergency Fed fund rate cut, and the anticipated .25-.5 point cut. While many economists are skeptical about whether the rate cuts and stimulus package can prevent recession, Americans are excited about the prospect of an early summer bonus, tax rebate check.

In theory, the tax rebate checks would create a systematic economic impact that would help spin the slumping US economy forward. The government hopes Americans will take their checks and spend them, not save. This seems like a reasonable expectation considering most Americans currently spend more money each month than they make. It is certainly reasonable to believe many will spend the checks within a short time.

If Americans do spend the checks, the spending should help boost struggling businesses. If businesses see increased cash flow, they would likely look to expand, grow, and hire more workers. This would help them offer more attractive products and services, while lowering unemployment. This domino effect could potentially help offset ongoing trouble in the housing and mortgage markets due to new job creation, and overall improved economic conditions. Consumer confidence, which is currently waning, would go up and the improved economic environment might lead to greater investment in housing and properties.

Of course, this domino effect is the ideal scenario. Many question the likelihood that the plan will work. However, a similar, but smaller rebate issued in 2001, shortly after Bush took over, is believed to have helped boost economic conditions. Lawmakers are hoping the checks will be mailed as soon as possible. If the rebates are delayed until June or July, economic conditions could be significantly different.

Ultimately, improved consumer confidence could be the deciding factor in the success of the rebate. If consumer’s are more confident in the economy when they open their mail box in May or June, they are more likely to be comfortable spending the extra money, as opposed to saving it, or paying down debt.

Market Recap

The Dow followed up last week’s late surge with a strong 176 point gain Monday, and another 96 point gain on Tuesday. The index has spiked over 600 points in the last week following a move below 12,000 early last week. The NASDAQ and S&P both climbed 8 points Tuesday. Hopes for another interest rate cut announcement (January 30) at the conclusion of the Central Bank meeting is driving the market, along with the tax rebate stimulus packages. Markets are overlooking record foreclosure numbers, horrible existing home sales, and poor 4th quarter results from the likes of Yahoo, in hopes that the combination of interest rate cuts and tax rebates will stimulate the economy.

Neil Kokemuller
Tuesday, January 29, 2008
6:18 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University with a specialization in marketing.

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