Reports following Federal Reserve Chairman Ben Bernanke’s Monday meeting with Speaker Nancy Pelosi indicate that House Democrats are considering a $100 billion economic stimulus package that “money for ailing state governments, higher Medicaid spending and an increase in food stamp payments.” Completely ignoring their election promise to pay for any proposal increased spending by raising taxes or cutting spending elsewhere, Democrats are also considering tax rebates of $300 to $500.
Such a plan would not help stimulate the economy since tax rebates do no stimulate the economy. Tax cuts do. High tax rates reduce economic growth by making it less profitable to work, save, and invest. Reducing Marginal income tax rates has been shown to motivate workers to work more. Tax rebates fail to stimulate growth because they do not encourage productivity or wealth creation. No one has to work, save, invest, or create new wealth to receive a rebate.
Neither do rebates ‘inject’ new money into the economy. Every dollar the government rebates into the economy must first be taxed or borrowed out of the economy. No new spending power is created. Nor is money transferred from ‘savers’ to ‘spenders’. People to not keep their money in mattresses. Americans have their money in savings (where it finances business investment) or bank deposits (who lend it to others to spend). Tax rebates only redistribute existing wealth.