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"Feeling Stimulated Yet?"

by Greg Mermel, C.P.A.

Published in the "Money and Taxes" column in PerformInk on June 20, 2008

When the plan for Economic Stimulus Payments (sometimes known as the tax rebates) was announced earlier this year, I thought it a stupid idea, ineffective for the economy except in the very short term, and more of an election year stunt than anything else.

That opinion still stands.

What I missed somehow is that this project was hastily conceived and not well thought through, and that it would be both badly executed and surrounded by a shadowy cluster of bad information, limited information and misleading information. Just like the Iraq war, and brought to you by the same group of people.

"Where's Mine?"*

The White House spin, and uncritical news reporting that followed, gave the American public the impression that the money fairy would simultaneously be sprinkling cash over everyone in early May. Some of us knew better.

Think about the logistics. The payments are based on 2007 individual income tax returns, of which the IRS had received roughly 137 million by April 15. Just how fast did people think checks could be written?

"Aha, but so many of us receive our refunds by direct deposit. Didn't that speed it up?"

Yes, it did speed the process for many people, though the IRS has not chosen to tell us how many. But even then, it took three full weeks to process that many payments and send them through the automated clearinghouse system.

All the other taxpayers have received checks. Or will receive them. As I write, the IRS is less than halfway through issuing them. The last of the paper checks are supposed to be mailed by July 11.

And the perhaps 20 million taxpayers who filed for extensions? You'll be paid "later." That is as specific as they get. "Later."

"A fine mess you've got us into, Stanley"

The answer to "where's mine?" could also be "not where it should be." The IRS wisely headed off one potential set of problems involving Refund Anticipation Loans (RALs). If you aren't familiar with this legal form of loansharking, people borrow against the money due them for an "instant refund." Annual percentage rates on these loans can be as high as several hundred percent. The lender has great security for the loan, as it receives the taxpayer/victim's refund directly from the IRS.

The IRS knows which refunds were sent to RAL lenders, and wisely ensured that those taxpayers will receive paper checks instead. Eventually. This is good public policy, but means that those who were most desperate to quickly receive their tax refund will receive their Stimulus Payment late.

So they got that one. Here's a few points they missed.

Many people like to use their tax refund to fund their IRA contribution for that year, but would often have to sweat whether the money would arrive in time to be contributed before the April 15 deadline. Starting with 2007 tax returns, taxpayers could have their refund sent directly to an IRA. Direct deposit eliminated this risk.

But since the only direct deposit information the IRS has for those taxpayers was the retirement accounts, the tax rebates were being sent there.

This is a double problem. First, if the money stays in a retirement account, the purpose of stimulating spending is defeated. Second, money deposited into an IRA and then withdrawn before retirement age is subject to a penalty. Ouch.

The IRS hastily issued a ruling saying, in effect, that tax rebate money accidentally put into IRAs can be taken out without penalty. I expect that ruling, too, to somehow wind up in the zone of misunderstandings and unintended consequences.

They also failed to consider how to correct mistakes, like a taxpayer who should not have received a rebate, but did. This happened to the teenage son of one of my clients. As a dependent, he's ineligible. But that box wasn't ticked on his tax return, so he received a payment. I called the IRS to find out the procedure for returning it. The essence of a long discussion I had with a senior representative in the Practitioner Priority department: there is no provision for returning payments made in error - even if the error was made by the taxpayer. I quote: "we were told to just say ‘keep the money' and that's all we were told."

My God, what an open door for fraud. You might as well stand on a street corner handing out hundred-dollar bills to anyone who says he hasn't yet received his rebate.

"The Mass of Men Lead Lives of Quiet Desperation"

Has the stimulus worked? What was its purpose? To inspire confidence in the economy? That's not going to happen with this President. To spur hiring? No business will hire new employees for a short-term burp in the economy.

Today's news did report an increase in consumer spending during May. There's no way to tell, however, whether that went to discretionary spending or merely reflects the runup in gasoline and food prices. My guess is that we'll see a similar figure in June, then a fall when the supply of rebate money is gone.

There's no question that those at the bottom of our country's economy could desperately use the money, and there are a lot of them. Twenty percent of American households had 2006 incomes below $20,000.

What those households really need is something more lasting than a one-time handout - perhaps a raise at work, or even just a job to begin with, and actual health care would be nice, too. Similarly, this is a short-term, myopically-domestic approach to a long-term global problem. In the middle of the last century, America set out to export some ideas to the world: capitalist economies, economic development and the importance of an educated bourgeoisie. We succeeded, too. No more Soviet Union, no more dictatorships in Europe (remember Franco? the Greek military junta?). The rising middle classes in China and India and eastern Europe also want to eat well and drive cars and have nice homes. When we address this massive shift in the supply-and-demand balance, and the change in America's economic role in the world - as I desperately hope our next President will - then our economy will run smoothly again.

* Mike Royko's proposed official motto for the City of Chicago, replacing "urbs in horbis.")

Free Offer

Every year during the income tax season, I offer free copies of my “Checklist of Potential Deductions...” for those in the arts. Just call my office, or send an email to checklist@gregmermel.com.

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