Stimulus questions?

Many taxpayers have been asking questions about the possibility of another "stimulus check" this year.

Of course, we are unable to give them any definitive answers, since Congress and the President still have to work out the details, but at this point, it looks like the stimulus will take the form of reduced withholding, rather than mailed-out (or direct-deposited) checks.

Interestingly, all the taxpayers I've talked to seem rather disappointed when we tell them that the current legislation under consideraton will not generate an additional check in the mail (or direct-deposit) of a lump-sum.

Why is Congress not thinking of another round of stimulus checks?

I can think of a number of reasons:

Last year's stimulus checks created a great deal of public confusion, administrative headaches, and general chaos. A lot of money had to be spent on getting the word out to American on how to file for the stimulus checks, when they would be mailed, how they would be calculated, and actually mailing out the checks (or direct-depositing them.) Many checks could not be delivered because taxpayers had moved with no forwarding address after filing their tax returns several months before the stimulus checks were mailed. Taxpayers who had requested direct-deposits of their 2007 refunds automatically had their stimulus payments deposited into the same bank account, but this created still more problems. Some taxpayers had requested direct deposits of refunds into IRA accounts and additional deposits of stimulus payments might have triggered penalties for contributions in excess of annual limits.

The IRS received a huge number of phone calls inquiring about all these questions, and it had to pull many IRS employees away from their regular job assignments. This resulted in fewer audits and less collection activity last year.

At our VITA site, we are still dealing with the repercussions of that as we help taxpayers file their 2008 tax returns. All over the country, tax preparers are reporting that many taxpayers aren't quite sure about the amount of last year's checks, or they recall the amount incorrectly. As a result, if it looks like the taxpayer did not get the correct amount of the stimulus payment last year, we always encourage our clients to check the IRS on-line webpage "How much was my Stimulus Payment?"

Reduced withholding rather than another round of check-mailing and direct-depositing would be administratively much less costly.

In addition, a change in withholding could take effect much faster than another round of checks. Last year, Congress passed the stimulus bill in February, but the stimulus checks didn't start flowing until May through July (depending on the taxpayer's SSN and whether he had requested direct deposit.) Some people filed their 2007 returns late and got their stimulus even later during the year, and some people will only be getting their 2008 stimulus as part of their 2008 refund during the current filing season.

Some economists also believe that taxpayers will have a higher "propensity to spend" if this year's stimulus takes the form of lowered withholding (slightly higher paychecks all year) rather than a single lump-sum, which they might otherwise be more inclined to save rather than spend. This is an empirically testable question, and not all economists agree on the evidence, however. As the Tax Policy Institute's recent "Tax Stimulus Report Card" states:

Research based on credit card data showed that low-income households spent about 75 percent of their rebates from the 2001 tax stimulus (Johnson, Parker, and Souleles 2006). Shapiro and Slemrod (2003), however, found that low-income families spent much less than three-fourths of their 2001 rebates and not much more than higher-income families.

For some useful information and several rather different opinions on the current stimulus proposals, read:

The Tax Policy Center's "Tax Stimulus Report Card"

The Tax Foundation's "New CBO Report Confirms Suspicions about New Stimulus Plan"

James Surowiecki's New Yorker opinion piece: "A Smarter Stimulus?"

Yale Professor Robert Schiller's Wall Street Journal opinion piece: "Animal Spirits Depend on Trust: The proposed stimulus isn't big enough to restore confidence."

Harvard Professor Martin Feldstein's "An $800 Billion Mistake" in the Washington Post