William Hummel:

Let's suppose Congress decided on a $100 billion reduction in
income taxes this year.  Assume there are two proposals being
considered, a 5.56% rebate of everyone's tax liabilities (total
current liabilities are about $1,800 billion), or a flat $1,000
tax rebate to the 100 million taxpayers.  Which of these
proposals would have the most beneficial effect on the economy?

William 


Hi,

Sounds like a reasonable question. And it is an indication of 
the state of development of economics that not only is there 
no agreement on the answer, but not even agreement on whether 
or not either choice would have a beneficial effect.

Rather like a group of physicists debating the result of the
famous Galileo experiment from the tower of Pisa, before the
two balls are dropped.  Some say the heavy one will fall faster,
some say they will fall together, one school of thought claims
they will rise, and others say they will just hang motionless.

But I'll offer my guess :-)

OPTION 1

The option of a $1000 rebate to each family in the current
economy would likely result in a harmful inflationary
pressure.   There would be more money spent, but no
more goods or services to be bought. This would be bad 
independently of any action the Federal Reserve might 
take to offset it by raising interest rates.


However, this rebate could have a beneficial effect if the
economy was falling into a recession or if unemployment 
was higher than it is today.

OPTION 2

The option of a 5.56% rebate would also likely be 
inflationary, but maybe not as much so, since less of 
the added money might be spent on consumer goods.  Whether 
the propensity to consume decreases with income and the
propensity to save increases, is a debated question.
But if more of the money were saved rather than spent in
this option, the result would be less harmful and might
even be beneficial.

That is, if you believe the claim that the saving rate in
the US is "too low".

Since this is a "one time" rebate, neither option would
have the effect of increasing incentives and thus would
not provide the "supply side" effect.  

But if the $1000 were to be given each year to every
worker who had a job, it would become a sort of EITC
and could have a beneficial effect.


And if the 5.56% tax reduction were made a part of the 
tax code for the future, it would have the most beneficial
effect.  But the reasons why I predict that cannot be
explained in a few words.  Those interested can check
Supply Side U at   

http://www.polyconomics.com/univ.htm

When Galileo drops the balls, everyone can see which
prediction was correct.  But we can't do the equivalent,
so we will be debating the same issue a decade from 
now :-(


--
                     ,,,,,,,
_______________ooo___(_O O_)___ooo_______________
                       (_)
jim blair (jeblair@facstaff.wisc.edu) For a good time call
     http://www.geocities.com/capitolhill/4834