Republicans and Democrats hailed the newly announced income tax rebates as a preventative measure to ward off recession. The rebates amounting to $600 for individual taxpayers and $1,200 for joint tax filers are supposed to ratchet up consumer spending. Even those earning $3,000 or more would get $300 back, even though they do not pay income taxes.
The goal of this is to provide a boost to an ailing economy that is by some accounts already falling into recession. However, these rebates will not have the intended effects.
Money Already Spent
Americans have already spent the money that they are expecting. Some Americans are deeply in debt, struggling to meet credit card minimum payments or trying to avoid foreclosure due to interest rate resets.
Most money will go to pay off bills. Christmas bills have yet to be repaid, which could take several months for many families.
American families not already in debt trouble have the discipline to save. These families are expected to put the bulk of the rebate into a savings plan or other investment.
Purchases to Help Foreign Economies
Those families that are expected to spend freely will likely buy consumer electronics and other imports. These goods may help foreign economies, but they do little to keep American factories producing.
We expect to see limited positive impact from these tax rebates. Additional job cuts and stock market losses are expected to continue through the first half of 2008.
One thing that almost anyone agrees on is that the current crisis was created by weak regulation that contributed to the subprime mortgage crisis. Until the regulations are tightened to ensure creditworthiness of home buyers and ethical treatment by mortgage brokers, the cycle will surely repeat itself.
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