Goldman Sachs writes:
>Tax Rebates Stage a Comeback, May Bolster 2H01 Demand Outlook
>
>To our surprise, it now appears that there will be a strong
>effort from the Bush Administration to get a tax rebate scheme
>included in the final tax-cut legislation when it emerges from a
>House-Senate conference committee, perhaps by Thursday or Friday
>this week. Previously a rebate seemed very unlikely because
>neither the House nor the Senate included a provision for one in
>their separate tax bills, and also there were numerous reports
>that senior economists in the White House were firmly opposed to
>the idea.
>
>Apparently it is the Treasury Department, led by Secretary Paul
>O'Neill that is pushing hard for a rebate so as to bring forward
>in time the potential positive demand effects from making the
>reduction of the lowest income tax bracket retroactive to last
>January 1. As we have written previously, making a tax rate cut
>retroactive does not do anything by itself to quickly enhance
>spending power; that requires some further step, such as an
>abrupt reduction of tax withholding or a rebate, to get the funds
>into private hands (see `Large Tax Cuts Need Not Jolt Financial
>Markets,' U.S. Economics Analyst, February 9, 2001, pp. 5-6). In
>the absence of such a special adjustment, the retroactive
>component of the tax cut would not reach the public until the
>normal annual tax filing and refund season, in January/May 2002.
>
>The strong desire of some in the administration to enact a rebate
>with this tax plan suggests a higher level of official concern
>about the near-term economic outlook than they have betrayed
>publicly in recent weeks. It seems officials wish to take out
>some insurance against the risk of a late-2001 demand slump by
>pulling forward in time the transfer of funds from the Treasury
>to households. This would help shield President George W. Bush
>against criticisms from congressional Democrats and others that
>his tax-cut plan does not do enough to alleviate the pain of the
>current business slowdown. This president may wish to show
>special sensitivity on the point because his father, the former
>president, was defeated in a bid for re-election amid complaints
>that he was not in touch with the economic distress of the
>country. In this regard, there are reports that the
>administration might send a personal message from President Bush
>along with any rebate checks, to gain credit for making the extra
>financial resources available to individuals.
>
>If a tax rebate were adopted by the House-Senate conference, then
>we would expect the following terms:
>
>1. Size: Between $25 and $40 billion. Firm judgments about the
>size of a rebate program must await completion of the tax
>bill, as it will depend on what amount of tax reduction
>derives from the retroactive rate cuts. Under the terms of
>the Senate bill, and assuming income tax withholding
>adjustments cannot be initiated before September 1. This
>would amount to around $25-$30 billion.
>
>2. Timing: Rebate checks could be in the mail by late August. If
>the tax bill is completed next month and signed by President
>Bush in early July, then we would expect the Treasury to begin
>sending out any rebate checks by late summer. It is unlikely
>that it could be started any sooner, given there are apt to be
>some administrative difficulties involved in mailing out funds
>to millions of households through a special program.
>
>3. A moderately positive impact on consumer spending would likely
>be felt in the later months of 2001. Coming on top of a
>withholding tax cut amounting to roughly $3 billion per month,
>a tax rebate totaling $30 billion could provide notable
>support for consumer demand late this year. The impact of the
>rebate on spending should not be dollar-for-dollar, though, as
>many households could regard the funds as a special windfall
>and effectively an addition to wealth as opposed to a change
>in their income streams. If one assumes that households will
>spend 75% or more of the gross tax withholding reductions, but
>only about 50% of the rebates, then the net stimulus to
>consumption demand from these two sources would be about $25
>billion over the last four months of the year. That would
>amount to about 0.25% of GDP, and since it would all occur in
>the last four months of the year the impact on annualized
>aggregate demand growth for the period might be roughly 0.6%.