Tax rebates don’t work

On Sept. 10, Carolyn Lochhead, editorial writer for the San Francisco Chronicle, wrote, “It’s the stupid economy, to borrow a delicate phrase, and only a war will rescue Republicans if it doesn’t turn around soon.” Well, since the United States began its war on terrorism, President George W. Bush’s approval rating has shot up to 90 percent, despite the slowing economy. Those were prescient words by Lochhead. If only our national and state governments had such insight.

Amid calls and clamor remains. How are we going to fund all the needed spending? So far, lawmakers have government decided to give money back to taxpayers in the form of rebate checks, when instead they to shore up domestic security, another less urgent but equally necessary question could have held onto the money for tough times like now. The state of Minnesota answered with a classic course in Reaganomics. They cut taxes while also spending more on a whole array of causes, especially defense spending. No one can reasonably argue against the need for increased defense spending, nor is it a good idea to raise taxes during a recession. However, it is puzzling that after the longest period of economic growth in U.S. history, the government finds itself short of funds. “There’s really no money to spend this next session … I think everybody’s feeling the pinch of the economic slowdown, and the state is really not in a position to do much in terms of funding,” said state Sen. Julie Sabo, DFL-Minneapolis.

Yet only a few months ago, they gave back $1 billion and the federal government gave back $38 billion. Initially they returned this money to taxpayers because the government was running a surplus. And the surplus would keep growing, officials reasoned, because the economy would keep growing. Proponents of the rebate felt America was in a “new economy,” where growth goes on forever, despite that, historically, recession has always followed economic growth. Both Ventura and Bush ran on this platform. Unfortunately though, the growth ended.

But proponents of the rebate didn’t lose a beat. Now, they reasoned, the tax rebate would stimulate the economy and avoid a recession. This type of Keynesian economics didn’t work either, though. A University of Michigan study found that 46 percent of people planned to use the money to pay down debt, 36 percent intended to put it away, and only 18 percent planned to spend most of it. And that is exactly what happened. The tax rebates increased disposable incomes in August by 1.9 percent, but consumer spending only increased by 0.2 percent, according to the Department of Commerce. The end result: Our government wasn’t able to stop the recession and ineffectively spent billions.