College of Business: University of Illinois at Urbana-Champaign

Important Site Links

Fullerton: The Coming Tax Rebates


4/23/2008

Photo: Don FullertonEditor's Note: More than $150 billion in federal tax rebates will be doled out starting next month - cash the government hopes burns a hole in taxpayers' pockets and lights a fire under the nation's listless economy. Retailers are already jockeying for a share of the windfall, worth up to $600 for individuals and $1,200 for married couples. But Don Fullerton, a visiting professor in the University of Illinois finance department, says taxpayers should do what's best for them - even if it means squirreling the money away for retirement or a rainy day. Fullerton, a University of Texas economist who served in the U.S. Treasury Department as deputy assistant secretary for tax analysis, was interviewed by News Bureau Business & Law Editor Jan Dennis.

How does the government hope people will use their tax rebate checks?

The government is hoping that a high fraction of the tax rebate checks will be used by recipients to buy needed goods and services, and that this spending will increase demand in a way that stimulates the economy, increases output, and decreases unemployment. But I don't think that the government is assuming all individuals ought to spend their money that way. Different people have different needs, and some may need to save that money for college tuition, for a new house, or for retirement. Hopefully each person can use the money for their own needs in a way that raises everybody's well being.

If people use the rebate that way, is it likely to impact the economy?

If enough people do choose to spend it now on goods and services produced in the U.S., and that increases U.S. production, then we might avoid a recession or at least avoid a very damaging recession. On the other hand, I don't think that even this tax rebate is enough to ensure a favorable outcome. It might help, but it cannot guarantee anything. In fact, we have to keep in mind the cost of this tax rebate program - the fact that government will have less money to spend on needed public programs.

Is the government's vision the best use of the money for most people or are there other options they should consider?

As I just described, the best way to raise each person's economic welfare is to allow each person to choose for himself or herself how to spend the money. One goal of the tax rebate program is to stimulate the economy via spending, but a lot of government economists are also worried that people don't save enough either! So we don't want this program to reduce private savings; each person could decide how to use it.

Should people look out for scams as predators try to cash in on billions of new dollars that will flood the market?

The ways in which people might spend or save their tax rebate check are not all that different from the ways in which folks spend any money they might have or earn, so I don't think we have any particular fears about scams here, but of course predators are already out there trying to take advantage of some consumers, and so consumers should remain vigilant. It is not wise to invest in any "get rich quick" scheme without careful investigation. Talk to advisors about investments, and about insurance needs.

(Story courtesy of the News Bureau)

UIUC College of Business