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Economic News, Data and Analysis

TRA 2001 – The Economic Growth and Tax Relief Reconciliation Act of 2001


Some notes on tax policy and the macroeconomy


Rebates

Budget Consequences
The Macroeconomy: Spend or save?
Side note: NBER on the recession
The IRS letter


Rebates – the check is in the mail (maybe)

The
rebate checks
will be mailed out beginning in the next few weeks and
will be up to $300 for singles and $600 for couples. The rebates will go only
to those that pay federal income tax. This distinction is important
because even if you’ve paid Social Security or Medicare taxes you may not
have earned enough income (after deductions) to qualify for the rebate.
One estimate
says that 42% of people earning less than $44,000 a year
will get no check.

In addition
to the rebate check, the amount of paycheck withholdings will also change
(as of 7.1.01).
Details can be found here. Briefly, rates will drop about ½
percentage point per year until they reach the new rates.  


Budget Consequences

The Congressional
Budget Office (CBO) has
revised their estimates
of the projected surplus. Last January, the
CBO budget forecasters had expected the surplus (excluding Social Security
and Medicare funds) to total $489 billion from 2001 through 2004. The more
recent estimate is $127 billion.

Virtually
all of that reduction — $310 billion — was due to the tax cut. Most of
the remainder was due to lower corporate profit tax receipts from a slowing
economy.

For more
information see:
CBO:
An Analysis of the President’s Budgetary Proposals for Fiscal Year 2002

(5.2001)


The Budget and Economic Outlook: Fiscal Years 2002-2011
(1.31.2001)


OMB HomePage


Will the rebate checks boost the economy?

It depends
– will people go out and spend the money or will they save it by putting it
in the bank or paying off credit card bills?

In theory,
people are more likely to spend the tax cut if they know that it will be
a permanent cut. If the cut is temporary, then they should save the money
to pay for higher tax bills down the road. (Officially the tax cut is temporary
– to keep the published 10-year cost down, the tax cuts expire after 9 years;
but most expect congress to make the changes permanent).

So whether
or not the cut will spur people to spend depends in part on people’s perceptions
of the persistence of the cut.

In addition
let’s do some simple math to check on the size of the rebate. If every member
of the workforce were to receive the check (and they’re not), it would mean
an influx of $300 x 140 Million = $42 Billion. The size of the economy is
roughly $10 Trillion. So we’re talking about a rebate of 0.42% at most.

The total cost of the tax cut is about $74 billion this fiscal year, with much of that coming from changes
in withholdings.

See the BLS website for labor force data.
[Note: 7.8.00. The above numbers were adjusted from a previous version of this article to take into
account the size of the labor force and to correct a math error.]

Additional
reading:
Tobin on
Fiscal Policy: The Macroeconomic Perspective


The Phantom Recession (con’t).

A few weeks
ago I wondered what was happening with this so-called recession that
everyone is obsessing over. Real GDP in the first quarter of 2001 grew at a slower-than-average-but-greater-than-zero
1.2 percent. It looks like others are not yet ready to declare a recession
either.

The organization
which determined the official beginnings and ends of recessions, The National
Bureau of Economic Research (NBER), recently (6.18.01) posted
a note on their website
saying that the business cycle dating committee
has yet to meet 

“In summary,
the data normally considered by the committee indicate the possibility that
a recession began recently, but the economy has not declined nearly enough
to merit a meeting of the committee or the determination of a peak date.”
 

The note
comments that employment has declined only slightly, and that the contraction
appears to be limited to the industrial sector and has not spread.


The IRS Letter

In addition
to your check from the IRS you will also receive a mailing from the IRS telling
you to expect a check in the mail.
It was reported
that the text of this letter has raised a few eyebrows
because it appears to be slightly partisan in nature. In addition, the letter
will cost somewhere between $20 and 30 million.

From the
IRS letter
: “We are pleased to inform you that the United States Congress passed and
President George W. Bush signed into law” the tax bill, “which provides long-term
tax relief for all Americans who pay income taxes. The new tax law provides
immediate tax relief in 2001 and long-term tax relief for years to come.”

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