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QUESTIONS & ANSWERS

Multiplying the effect of a dollar spent

January 19, 2008|Kathy M. Kristof and Jonathan Peterson | Times Staff Writers

In a blast from the not-too-distant past, the Bush administration has proposed an economic stimulus package that would put cash in the hands of consumers. How might it work, and how could it affect you?

What's been proposed?

The plan has not been formalized. However, Bush has asked Congress to work with him on a package, worth as much as $150 billion, that would provide "direct and rapid" tax relief to individuals and create tax incentives for businesses to expand operations and create jobs.

Experts believe that means there would be write-offs for companies that buy equipment or invest in research and development. And there would be a tax rebate program, much like the one in 2001.

What form would the rebate take?

No one knows for sure, but the Tax Foundation speculates that the current 10% tax bracket would be dropped to zero for one year -- meeting Bush's goal of creating a temporary but swift benefit. Currently, single filers pay 10% tax on about $8,000 in taxable income and married couples pay 10% on the first $16,000 they earn. If that bracket drops to zero, singles would pay $800 less and married couples would pay $1,600 less on their 2008 returns.

Because Bush wants to stimulate the economy quickly, the gain would be advanced to taxpayers through checks from the Internal Revenue Service.

When would I be likely to receive a check?

Even if this passed quickly in Congress, the IRS probably would be hard-pressed to send out checks before it finishes processing tax returns filed by the April 15 deadline. If 2001 is any guide, the first checks would go out in the summer. That year, the IRS sent them in batches over a two-month period, based on taxpayers' Social Security numbers.

Why would this stimulate the economy?

Economic growth is fueled by consumer spending. The presumption is that if Americans get money in their pockets, they'll spend it. If all goes well, that creates a multiplier effect in which additional spending creates additional hiring, which creates additional income, which creates additional spending, said economist Peter Morici. As growth gains momentum, $1 spent can eventually create $2, he said.

Why did Bush say that a stimulus was needed now?

Economic growth slowed sharply late last year. Virtually all experts believe that a weak housing market, exacerbated by the sub-prime mortgage debacle, threatens further harm. Many economists say the economy already may be tipping into a recession -- a period of contraction characterized by job loss and, perhaps, a continued drop in the value of homes and other assets.

Won't all this spending expand the federal deficit and hurt the economy further?

Some analysts say that a properly crafted measure will spark gains in consumer spending, raise confidence and then expire before it does lasting damage to the nation's ledger. Others say that without addressing some fundamental shortcomings in the economy, the measure will provide a temporary boost to spending, but that won't be enough to lift the economy out of the doldrums.

What are the political prospects of this happening?

The prospects for passing some sort of stimulus plan are good, although it may not end up entirely as Bush envisioned. Members of both major parties Friday made conciliatory remarks about the need for a proposal, but the Democrats are not convinced that the tax code is the best way to deliver relief.

Why?

The primary reason is that you can offer a tax cut only to people who pay income taxes, and 42 million U.S. households don't earn sufficient income to pay taxes at today's rates. That would leave them out.

What's being proposed by Congress?

Some Democrats are suggesting that the government provide aid through social programs, such as extended unemployment benefits and assistance with energy bills.

Republicans are more inclined to help business as a way to jog the economy. The theory is that businesses create jobs; jobs create wages; more people with better wages ultimately provide a longer-term boost to the economy. Worsening economic stress increases the chances for compromise.

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kathy.kristof@latimes.com

jonathan.peterson@latimes.com

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