Deal or No Deal: Stimulus Moves Ahead

By :: January 24th, 2008

Well, it could have been worse.

President Bush and House leaders say they have cut a deal on a $150 billion stimulus package—about $100 billion for families and individuals and about $50 billion for businesses. The centerpiece of the plan: a cash payment of at least $300 for most wage earners, along with an additional $300 per child.

But, like everything else in Washington these days, this plan is not simple. Workers who earned less than $3,000 last year would get nothing. Those who paid at least $300 in income taxes would get checks from $300 to $600 ($1200 for a couple). Those making more than $75,000 (or $150,000 for a couple) would get just a partial rebate and those making more than $87,000 would get nothing. As grandma would say, "I have such a headache."

TPC estimates that half of all tax filers—about 68 million--would get the full rebate, while about 39 million families and individuals would get no benefit. At least this structure will, more or less, get the cash in the hands of those most likely to spend it.

One big problem: the IRS probably won't be able to get the checks out until spring or summer even if Congress can pass the plan right away. And, before we all sing the last chorus of Kumbaya together, the Senate has not signed on to this deal. Finance Committee Chairman Max Baucus (D-Mt.) plans a mark-up for next week and some Senate Democrats already are saying they want to add extended unemployment benefits and food stamps to the package.

If getting money into the economy quickly is your goal, boosting food stamps is probably the fastest way to do it. But it will be interesting to see how hard Democrats fight for it.

The most important proposal in the whole package has nothing to do with taxes. It would raise the limit on Federal Housing Administration loans and hike the cap on conforming FannieMae and FreddieMac loans from $417,000 to $625,500. These changes may help free up the now-frozen mortgage market.

The good news is that even in an election year, Bush and congressional Democrats are showing some signs that, when they want to, they actually can work together. The question is: Will this era of good feelings last long enough to get a bill signed into law?

2Comments

  1. Anonymous  ::  1:38 pm on January 25th, 2008:

    Last year, Len Burman proposed a 4% surtax on AGI over $100k single/$200k joint. Now Congress is granting his wish in its own fashion. The phaseout of stimulus payments is mathematically equivalent to a 5% surtax on AGI over $75k/$150k. The phaseout “surtax” ends at $90k/$180k (based on one child), ensuring that the rich do not suffer unduly.
    Congress' most creative trick was to make this “surtax” retroactive to 2007. Very few of us can do anything about our 2007 AGI at this point, so this surtax will have no damping effect on reported taxable income.
    Anyone in the new phaseout range who thought he was paying a marginal rate of 15% on dividends and capital gains was mistaken. Probably he was already paying an effective marginal rate of 21.5% due to the phaseout of the AMT exemption (see http://fairmark.com/amt/ltcg.htm).
    Now the simple math of this rebate has retroactively boosted his 2007 effective marginal rate on dividends and capital gains all the way to 26.5%. His effective marginal rate on ordinary income has been boosted to 37.5%, well above the statutory marginal rate for million-dollar earners. Where are all the high fives from advocates of higher taxes? Or do they find themselves caught in a marginal rate trap of their own devise?
    I suppose to an economist this tax policy may seem reasonable, but it's not making much sense to me.

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