Guest Post. . .
Posted by Bruce in 2008 Stimulus, Form 1040 Information, Opinions, Stimulus payments, Taxes, Things forgotten, UncategorizedTHAT WAS THE ECONOMIC STIMULUS REBATE THAT WAS
by Robert D. Flach
(My name is Robert D Flach. I have been preparing 1040s since 1972. I write the tax blogs “The Wandering Tax Pro“, “Ask the Tax Pro” and “The Flach Report“. I am honored that Bruce has asked me to write this guest post on the economic “stimulus” rebate situation.)
Congress decided earlier this year that the way to help our sagging economy was to send out rebate checks. This was the usual Congressional quick-fix reaction to the situation instead of a well thought out response to the problem.
The last time Congress sent out rebate checks to stimulate the economy was in the summer of 2001. They were actually not “rebates” in the true sense of the word – but advances on the refunds taxpayers were going to get on 2001 tax returns filed in early 2002 – specifically the savings from the new 10% tax bracket. These checks cost the IRS a fortune, created tons of confusion, and resulted in millions of errors on 2001 tax returns! And it is doubtful that they did anything to stimulate the economy.
The 2008 rebate checks are not an advance on a 2008 tax reduction, as was the case in 2001. These checks represent a direct credit from the government. They come out of the budget and not a future refund. The current rebate checks will increase the federal deficit by billions of dollars.
The thinking behind the current rebate checks is, as George W put it, that putting money in the hands of Americans would “boost our economy and encourage job creation.” Upon receiving a check from the government we would all run out and buy something we really didn’t need, like a 50-inch television.
The regular readers of my blog will note that whenever I write of these economic “stimulus” rebate checks I put the word stimulus in quotations. And that I often refer to them as “election year bribes“. I feel that one should “call a spade a spade” – the concept of the rebate check has absolutely nothing to do with stimulating the economy.
Politicians love rebate checks. They are literally a way to legally buy votes. Citizens get a check in the mail and say “look what George W, or the Republicans, or the Democrats have given me” (in the case of the current rebate checks recipients receive letters telling them basically “look what we have given you”) and show their appreciation by voting for the party that gave them the check.
The Democrats had become famous for requiring “offsets” to pay for any tax reductions. However they did not blink when George W proposed the current rebates with no offset. If they had opposed the plan in an election year they would most certainly be portrayed as the villian and lose votes.
My home state of New Jersey has been sending homeowners and tenants alike “property tax rebates” for years now. In the early years of the program the annual checks were actually sent out on November 1st, so NJ taxpayers could say. “look what (then Governor) Brendan Byrne has given me” and run right out and vote for the Democrats.
The most recent revision of the NJ rebate program was supposed to send the money to the local municipalitieis so that an individual’s property taxes would be directly reduced by the amount of the rebate. Instead of a homeowner receiving a check for $1,000, the property taxes paid by the homeowner to the municipality would be reduced by $1,000. However this did not happen because it would have ruined the true reason for the rebate check.
The NJ budget had become such that state could not afford to send out rebate checks (because it was fat with double and triple dipping into the state pension and health insurance benefit plans by elected and appointed politicians holding two and three paying “show” and “no-show” jobs). So to keep the checks coming Governor Corzine raised the state sales tax by 1%. It was truly a case of robbing Peter to pay Peter! NJ took money out of one pocket via increased sales taxes for the sole purpose of putting money in the other pocket via property tax rebates.
Now that the first wave of federal stimulus checks have been mailed out let us see what they have done.
* Just as the 2001 rebate checks were a refund of 2001 taxes based on information from 2000 tax returns, the current rebates are an advance of a special “credit” on your 2008 income tax return based on the information reported on your 2007 return. And, just like with the last set of rebate checks, if the amount of the advance you receive based on your 2007 information is more than the amount you are actually entitled to based on the 2008 tax return you get to keep the money! You do not have to pay back the money to which you are not entitled under the law.
* The administration of the 2008 rebate program will cost much, much, much more than that of the 2001 rebate checks!
(1) The IRS first sent out a mailing to Americans during the tax filing season to tell them that they may be entitled to a rebate but that they had to file a 2007 federal tax return in order to get one.
(2) A few days before the actual check was mailed out a recipient would receive a letter to report that a check was “in the mail” and indicating the amount of the rebate.
(3) Then the check would arrive.
(4) If for some reason the check was not for the total amount of the rebate or there was no check, for example the recipient owed back federal or state income taxes and the rebate was used to offset this outstanding liability, another letter would arrive to so state.
(5) Early next year another letter will be sent out telling how much the rebate was, as this information will be needed to properly complete the 2008 federal income tax return.
Michael says of his pre-check letter in his post “Stimulus Payments – a Braggy Uncoordinated Mess?” at his “Beyond Paycheck to Paycheck” blog – “I get a letter (this one from my Congresswoman; the first was from the IRS) telling me how wonderful it is that I am getting a stimulus.”
The Government Accountability Office (GAO) issued a report on June 19th that reported (the emphasis is mine) – “The costs for implementing the economic stimulus legislation may be up to $862 million. IRS received a supplemental appropriation of $202 million for implementing the economic stimulus legislation. The Social Security Administration received a supplemental of $31 million and the Financial Management Service received a supplemental of $64 million. The reallocation of hundreds of IRS collections staff to answering taxpayer telephone calls will also result in up to $565 million in foregone enforcement revenue, according to IRS estimates.”
As Key Bell of the “Don’t Mess With Taxes” blog put it in a post on this subject, “administering the stimulus payments is likely to cost the agency, and the U.S. Treasury, much more than all our spending of the checks will recoup.”
As a point of information, TAX GIRL Kelly Phillips Erb reported in her post “Rebates Push Deficit to Record Highs” that “The economic stimulus payments – which qualify more or less as “free money” from the government – pushed the federal budget deficit to an all-time high of $165.9 billion in May.”
* If the rebate checks have stimulated anything they have stimulated confusion.
The GAO report referenced above also discussed the effects of the Economic Stimulus Act of 2008 on the Internal Revenue Service’s (IRS) telephone service.
“Demand for telephone assistance related to the economic stimulus legislation has been unprecedented, according to IRS. For the week ending May 24, volume was almost six times greater than the same week last year. Despite reallocating staff from collections work to answering stimulus-related calls, the percent of callers waiting to speak with an assistor who got through has declined markedly to 39 percent for the week ending May 24 compared to 80 percent for the same week last year.”
* The true extent of taxpayer confusion will not be known until the filing of 2008 federal income tax returns next year. We, and the IRS, still have to look forward to the millions of errors regarding the rebates that will inevitably be made on these returns.
* Those who have received 2008 rebate checks are not running out and spending the money on items that they would not otherwise have purchased – and therefore “stimulating” the economy. They are using the checks to pay down credit card debt, to help pay for essentials, and to invest in savings for the future – as they should be doing!
According to a poll conducted by CNN/Opinion Research Corp. at the end of April a whopping 82% of Americans believe the stimulus package won’t work.
An article titled “Report: Stimulus Checks Spent on Gas; Higher Fuel Costs Eat Up Tax Rebates, Consumer Advocates Argue in Study” (Link is broken) that appeared in the Newark Star Ledger in late June told us that New Jersey residents have used their rebates to pay for gas.
According to the article – “The rebate check approach was created with the hopes that consumers would increase their spending on goods and services,” said Brandi Kennedy, assistant director for the Montclair office of NJPIRG {New Jersey Public Interest Research Group – rdf}. “But as gas prices keep rising, American families have been pouring their stimulus money into their gas tanks.”
The National Retail Federation has reported that retail sales in June edged up 0.2% over May. The retail sales figures in this report do not include sales of automobiles, or gas station and restaurant receipts. If you take those excluded sources into consideration, the U.S. Commerce Department reported that retail sales actually decreased 0.1% from May to June. The chief economist for the NRF commented, “As retailers enter the back-to-school season, they will have to be creative in finding ways to get consumers to spend on discretionary items.” So it is clear that the stimulus checks are not encouraging consumers to spend.
I can guarantee that after all is said and done when I write about the affect of the 2008 economic “stimulus” checks I will be once again saying, “These checks cost the IRS a fortune, created tons of confusion, and resulted in millions of errors on 2008 tax returns! And it is doubtful that they did anything to stimulate the economy.”
TTFN
Copyright © 2008 by Robert D Flach LLC
© 2008, Bruce. All rights reserved. Republishing of this post must provide link to original post.
Tags: 2008 Stimulus, Guest post, Stimulus payments
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This comment from above: The 2008 rebate checks are not an advance on a 2008 tax reduction, as was the case in 2001. These checks represent a direct credit from the government. They come out of the budget and not a future refund. The current rebate checks will increase the federal deficit by billions of dollars.
Is not really completely correct. If persons did not receive a “full stimulus payment” but the 2008 tax return shows they are entitled they receive the difference on the 2008 tax return. For example a child borne in the year 2008 the parent(s) will receive the additional $300 stimulus on filing the 2008 tax return as well at the customary deductions/credits.
For example: The taxable income on the 2007 tax return for MFJ was $10800 which allowed a tax/stimulus payment of $1080.00 but the 2008 tax return shows a taxable income of $12000 they will receive the other $120.00 while filing the 2008 tax return. This in of itself may be a reason to not itemize on this years tax returns or to take smaller deduction than allowable.
For example: A 2007 tax return MFJ with 3 children under the age of 17 which allowed $2100 stimulus payment. If parents each make anywhere near the same amount (half of the income each) on the 2008 tax return, they perhaps should file MFS instead of MFJ if there are no EITC/Dependent Care credits. If they file 2008 tax returns MFS each shows on the 2008 tax returns to have received $1050 stimulus, therefore a parent claims all three children, that parent is entitled to $1500 credit and the other parent does not have to pay back any of the stimulus payment it received.
I stand by my statement that the rebate checks received in 2008 were not an advance on an already legislated 2008 tax reduction – but a true “gift” from the government.
This statement is 100% correct. As I stated in the post – the last time Congress sent out rebate checks to stimulate the economy “they were actually not ‘rebates’ in the true sense of the word – but advances on the refunds taxpayers were going to get on 2001 tax returns filed in early 2002 – specifically the savings from the new 10% tax bracket” which had been passed before the first rebates were even thought of.
It is true that the rebate amount will be recomputed on the 2008 return using 2008 information, and that any additional rebate amount that is due because the 2008 info is different from the 2007 info will be included as a refundable credit on the 2008 return – so that as you indicate a child born in 2008 could result in an additional $300 rebate credit.
However this money is still a 100% gift from the government and has nothing to do with a previously passed tax reduction. It definitely comes out of the budget and will certainly increase the deficit.
As for the example of filing MFS for 2008 to grab an additional $450 in rebate credit on the 2008 return – I do not have the time at the moment to research this more carefully. What I can say is that if it would work the couple should do a complete calculation of its federal and state tax liabilities under both MFS and MFJ to see if they would lose any tax benefits or end up paying more overall tax by filing separately – such that the additional tax would be more than the potential $450 in additional rebate.
TWTP