Last month I discussed a type of tax rebate that would give everyone an equal share of the pie. I pointed out that it would be the single greatest economic stimulus, other than wartime spending, in the history of the U.S. But the immediate demand for goods would be followed by either inflation or dramatic increases in production, which would in turn be inflationary.
This month we'll look at a plan that would give refunds only to people who actually paid federal income tax. Republicans tend to favor this plan, arguing that those who paid the most taxes should get the biggest refunds. Democrats, on the other hand, tend to favor distributing more money to lower income families, even though the amount of taxes they paid in the first place was relatively low.
As a transportation analyst, I'm most interested in the plan that will move the greatest amount of goods for the longest period of time. It would be foolish to energize the transportation system briefly and then fall back to significantly lower equipment demands. The disruption caused by this scenario would not be distributed evenly among carriers, and certainly not evenly among shippers and receivers. Contractual relationships and spot prices, neither of which serves the long-term interests of trucking, would determine priorities.
People at the lower income levels would be the most likely to spend their rebates on consumer goods, creating a jump in demand that could increase production and traffic at all levels of the distribution system. However, recent indications of an economic slowdown may make this group a little more cautious. If they use some of the money to pay down debt, there won't be as much of an immediate increase in demand for consumer products.
Rather than spend all of their tax-rebate money on goods and services, people in the upper middle class would be more likely to pay off some of their debt and put money into savings and investments. This would support both short- and long-term increases in consumption, as well as help provide much-needed capital for investment by enlarging the overall savings pool. Under this scenario, there might not be enough of an immediate increase in spending to jump-start the economy, but long-term increases would probably be sustained, as well as money for investment and future growth.
Those at the upper income levels would probably invest their refunds, since they can already buy whatever they want, whenever they want. This could provide a significant boost to the amount of money available for investment — by increasing the amount of money banks have to lend, as well as giving money to companies directly via increases in the value of their stock.
The problem with this rebate scenario is that there'll be a significant delay before everything falls into place. It takes time for the markets to adjust to the increase in funds; they must determine whether changes are transitory or relatively permanent.
So if we want to jump-start the economy immediately, this plan may not be the one. But in terms of the long-term benefit to society in general, it might be a good idea because it would ensure the availability of money for capital investment at a reasonable price. Without that, production and job creation will be on hold.
As you can see, this solution has some interesting twists that result in benefits for everyone. But our elected officials, who are always up for re-election, may be more interested in the plan that affects the greatest number of their constituents quickly.