The check’s in the mail

The first batch of tax refund checks is in the mail. During the next 10 weeks, more than 90 million American taxpayers will receive federal rebates as part of President Bush’s tax cut plan.

The rebates – $600 for couples, $300 for singles – are true windfalls for those taxpayers, as they were a late addition to the president’s plan. They’re a windfall as well for economists, who see the arrival of unexpected money as a rare opportunity to study the spending habits of Americans. The two major parties are doing their best to turn the event into a political windfall, with credit from a grateful public the reward.

For economists, the rebates will be the closest they’ll ever come to a controlled experiment, not just in money management but also in truthfulness. In a Washington Post-ABC News survey taken when Congress passed the tax bill at the end of May, only one-fifth of the 1,004 respondents said they would spend the money. Roughly one-third said they’d pay debts, slightly less than a third would save. If these 1,004 were being perfectly honest, the $38 billion cost of the rebate plan will be one of the wisest investments Congress has ever made – until now, Americans have had the lowest rate of savings in the developed world, carry some of the highest personal debt and have established records in recent years for bankruptcy and mortgage default.

Beyond that, economists say the rebates present a chance to test what they think they know about spending patterns. In general, economic theory holds that household spending changes only to reflect permanent, or at least on-going, changes in income – pay raises, job loss, tax cuts or increases. One-time changes, like most rebates, may result in a shopping spree, but not in changes.

But these rebates are different, in that they look one-time but are, in fact, ongoing – the coming checks are the retroactive part of a lowering of the tax rate on the first $6,000 of income for singles and $12,000 for couples. If Americans use the checks to begin long-term commitments, such as buying new homes or setting up investment portfolios, it will be an indication that the public understands the legislation and is responding appropriately. If there’s a sudden boom in sales of DVD players, either the public doesn’t understand or new economic theory is needed.

For Democrats and Republicans, the question is how to cash in on the rebates. While the tax bill has the president’s name on it, his original plan contained no rebates, it was provision suggested by Democrats to add an immediate economic stimulus and embraced by Mr. Bush and his party.

Both parties want credit if the economy grows; both also want to avoid blame if it does not and a future Congress is forced to chose between the rest of the tax plan and important and popular initiatives on prescription drugs, education and defense.

Although Republicans are scoring the most points right now with the 90 million Americans who just got letters from the IRS that their checks coming, there is a downside. The legislation approving funds to send the letters also required letters be sent to the 38 million taxpayers who aren’t getting rebates (they paid Social Security and Medicare taxes, but not income taxes), so insisting on the letters is for the administration a bit of turning silk purse into sow’s ear.

Those letters, by the way, cost $34 million to send. That Congress would approve such a sum mostly on letters telling 90 million people that they’ll soon be getting another letter should tell economists more than they really want to know about the spending habits of a certain group of Americans.