Thursday, March 20, 2008

Thursday, March 20, 2008

Northern Westchester Bureau Chief
Catherine Wilson

Analyzing the 2008 Tax Rebate Program

Two significant events occurred this Valentine’s eve, February 13th in Washington D.C. In town to attend a financial meeting, Governor Spitzer rendezvoused with “Kristen” at the Mayflower Hotel while, down the block, Congress and the Bush Administration were negotiating their own arrangements for a different kind of stimulation – the passage of the “Economic Stimulus Act of 2008”. Both acts will take time for their full impact to be revealed. Both acts are drawing comments from pundits and late-night talk shows. But local residents have some control over how one of those acts will personally impact them – the rebate checks they will receive, starting this May, courtesy of the Economic Stimulus Bill.

According to the Internal Revenue Service, most single individuals will receive a $600 rebate while married couples can expect $1,200. But individuals who paid less in taxes in 2007 than these amounts, and high income taxpayers, may receive reduced or no rebates. However, to be eligible for a rebate check, individuals must file a tax return with the Internal Revenue Service, even if their income levels and tax status do not usually require them to do so. On its web site,, the Internal Revenue Service explains how to obtain the rebate checks and
offers assistance to filers:

• Individuals and families must have at least $3,000 of income from any combination of earned income, Social Security retirement or disability benefits, certain Railroad retirement benefits, or disability compensation, disability pension, or survivor benefits paid by Veterans Affairs. The minimum economic stimulus payment is $300 for individuals and $600 for married couples.

• Once people file a tax return, they don’t need to do anything more. The IRS will do the rest. The IRS will begin issuing payments starting in May.

• Individuals who normally do not file a tax return but must do so this year in order to receive their 2008 economic stimulus payment can now use the IRS Free File program to help them file returns for 2007. Free File is available to 97 million taxpayers who earn $54,000 or less.
(source: Fact Sheet 2008-16).

The Guardian interviewed several local tax and economic experts as to the potential individual and national outcomes of this stimulus program. Larchmont resident, Julian Block, a nationally-syndicated tax columnist, advises Guardian readers to be aware, “If the major source of your income is disability checks, Social Security, Veteran’s benefits, Railroad retirement programs, or a modest pension, you will have to file a 1040 form to get your rebate”. The Internal Revenue Service recommends that such individuals write the words “Stimulus Payment” across the top of the form they file. Block also reminded local taxpayers, “In order to claim a child as an exemption, you need a social security number for him. So you will also need this number to obtain a rebate for your child”.

The stimulus package has already attracted scam artists who are preying on low-income individuals and seniors who need these rebate checks the most. Fake emails reportedly from the Internal Revenue Service instruct unwary recipients to provide their social security number in response to verify or obtain their rebates. “The IRS would never send out emails asking for your social security numbers. Such emails are scams,” Block warned. Another concern of local residents is that they will have to pay taxes in 2008 on the money received from this program. The Internal Revenue Service web site clearly answers this question: “The stimulus payment will not reduce your refund
or increase the amount you owe when you file your 2008 return”. Block did point out, however, “If you lose out on the rebate this year, you will retroactively qualify next year if you meet the requirements”. Not everyone will be receiving these rebate checks. Anyone who uses an individual taxpayer identification number (ITIN), will not receive a stimulus payment.

- The Internal Revenue Service also notes other groups of individuals who will not receive these rebate checks:

• You don’t file a 2007 tax return.

• Your net income tax liability is zero and your qualifying income is less than $3,000. To determine your qualifying income, add together your wages, net self-employment income, nontaxable combat pay, Social Security benefits, certain Railroad Retirement benefits and certain veterans’ benefits.

• You can be claimed as a dependent on someone else’s return. For example, this would include a child or student who can be claimed on a parent’s return.

• You do not have a valid Social Security Number.

• You are a nonresident alien.

• You file Form 1040NR or Form 1040NR-EZ, Form 1040PR or Form 1040SS for 2007.

In contrast, taxpayers who usually do not pay any federal income taxes, such as low income individuals and retirees, could qualify for
these checks. Block believes that this stimulus package “could have been more effective in targeting more individuals in lower income

Professor Ronald Filante, Associate Professor of Finance at the Lubin School of Business at Pace University in Pleasantville, concurs
with that assessment. Professor Filante notes that “people at the lower end of the economic spectrum are compromised by their debts and so many of those individuals pay high interest rates on those debts” but adds that those lower-income individuals will now have an opportunity to address some of their financial problems.”

Professor Filante advises them to use the rebate checks to “pay off that portion of their debt which has the highest interest rates. That rate of return on this money will exceed any return they can get elsewhere”. In comparison, Filante believes that any spending by higher-income groups is immaterial: “the richer you are, the less it matters what you do with this money”.

Filante disagrees with the economic basis behind the stimulus package – to give Americans money to spend to stimulate the slowing economy. “Spending is nice but saving is better” Filante points out. Professor Filante believes that in the short term the rebate program will worsen our federal deficit. “A deficit is a transfer of responsibility from us to future generations,” Professor Filante warns.

“Voters need to back politicians who will address both the cyclical problems (economic slowdowns and upswings) and systemic crises (social security system) that we face. With each year that goes by, it only worsens the problems”. Traditionally, the federal government’s approach to business and economics has been ‘laissez-faire’ (hand’s off ). That changed during the Great Depression when President Franklin Delano Roosevelt sought advice from economists such as John Maynard Keynes on what the federal government’s involvement should be.

According to Wikipedia, Keynes “advocated interventionist government policy, by which the government would use scale and monetary
measures to mitigate the adverse effects of economic recessions, depressions and booms. He is one of the fathers of modern theoretical macroeconomics”. Keynes’ book, The General theory of Employment, Interest, and Money is regarded as the most influential social treatise of the 20th century. It changed the way the world looked at the economy and the role of governments in society.

Taking Keynes’ advice, FDR initiated massive government projects and federal employment programs. Keynes, the author of The End to Laissez-Faire, famously remarked at the time: “If we don’t do anything, things will sort themselves out in the long run. But this ‘long run’ is a misleading guide to current a airs. In the long run, we are all dead!” Professor Filante’s warnings echo this sentiment – that we cannot afford to wait ‘for the long run’ for current economic problems to be solved.

Professor Michael Ulinski, Professor of International Business and Accounting for the Lubin School of Business at Pace University in Pleasantville, agrees with Filante’s recommendations: “People should concentrate on paying off old debts,” Ulinski notes. “Debt reduction is good for our economy if it encourages people to continue. If the tax rebates can be used to teach individual financial responsibility, to that extent, the rebates would be good.” Ulinski recommends that families should use their rebates as a teaching tool for their children by using these funds for savings and investments. Professor Ulinski also compared the current stimulus program to the previous tax rebates issued in 2001. “The 2001 rebates did stimulate the economy since they were spent,” Ulinski notes, “but current indications are individuals expect to use the new rebates to pay o their bills”. Ulinski continued “looking at the stock market and nothing else, the (2001) program appeared to
help. But consumer confidence also helps – optimism is important. So the psychological impact of the rebates can
fuel the economy”.

Professor Ulinski advises our readers to arm themselves with information about how to obtain their rebates. He suggests contacting the Internal Revenue Service at 1- 800-829-3676 or the American Association of Retired Persons (AARP) at 1-888-227-7669 for assistance. Professor Ulinski praised Pace University’s emphasis on “training students who are suited for careers but are also learning how to learn so they will remain open to new and continued ideas” and advised our readers to adopt the same approach by learning how to handle their own finances. “The AICPA web site ( has areas to instruct individuals on ‘how to use money smartly’ and how to save ‘rainy day money’. These are valuable lessons for all individuals to learn,” Ulinski notes.

Looking at the stimulus program from a national perspective, Professor Farhad Ameen, the Chair of Business and Public Policy at Westchester Community College in Valhalla, acknowledges it will have some impact but believes this will take “a few months”. Professor Ameen was disappointed that “certain provisions that the Democrats wanted, such as extending unemployment benefits and increasing
access to food stamps” were not incorporated into the program since he believes that “the quickest way to achieve stimulus is to give money to people who need it the most – the unemployed and the poor. They are the most likely to spend it locally since they will use this money on essentials like food, clothing, and shelter, whereas higher income groups will put these checks into a college fund or other investments and not spend it”.

Professor Ameen noted “fiscal policy in the past meant government stimulated the economy by spending money to employ people for projects as during the Depression. But ‘tax and spend’ became a political issue so now we have ‘monetary policy’, where our economic decisions are dictated by the Federal Reserve, rather than ‘fiscal policy’ where these decisions are made by our government. But the fiscal policy approach would allow our government to target the current stimulus money to where it should be spent – like on our infrastructure”.

Contrary to how individuals may manage their personal funds, Ameen notes that “when we are in a recession, that is exactly when we want government to ‘borrow and spend’. We need the government to make up the shortfall from lower tax dollars”. In contrast, when the economy is experiencing an economic boom, Ameen advises “that is precisely when the government should save funds”. While the Federal Reserve has been managing the economic slowdown by lowering interest rates, Ameen notes “one of the reasons our interest rates are so low is because foreign nations are willing to lend us money by buying our Treasury bills. We are borrowing from the rest of the world and a growing percentage of our debts are held by foreign governments like China”.

However, Ameen acknowledges that “it is in the foreign governments’ interests to buy US Treasury bonds since they are safe. They also offer those nations political advantages”. Japan is likewise currently experiencing an economic slowdown. Ameen notes that, in contrast to the US rebate program, “Japan is doing fiscal spending on its infrastructure, building bridges, to get money into people’s hands. Japan kept lowering interest rates but it didn’t help. You can only lower interest rates so far – you cannot go below zero. At some point you need a fiscal stimulus. You literally need what economists refer to as a ‘helicopter drop of money’ into the economy”. But a ‘helicopter drop’ may not do the trick since, as Ameen warns: “people make decisions on a lifetime of expected earnings, not on one check. It’s what economists refer to as the ‘permanent income hypothesis’. One rebate check may do little to stimulate spending in an individual whose lifetime earnings have never allowed for discretionary spending before”.

In contrast to his peers, Professor Surenda Kaushik, Professor of Finance for the Lubin School of Business at Pace University’s Graduate Center in White Plains, noted that the stimulus program “will help ‘slow down’ the ‘slowdown’ since the amount of the program is significant. It is over $160 billion, which is 1% of our nation’s GDP”. “Gross Domestic Product” measures a nation’s economy and represents total investments, consumption, and government spending.

Professor Kaushik is an expert on money and capital markets and noted that “money has a ‘multiplier’ effect. Assume the rebates will all be spent within 3 to 4 months. That’s the first round of spending. Then the recipients of that spending, like the store owners, will then spend that money. is stimulus program could trigger possibly two or more rounds of spending. This could essentially stop the slowdown so we could have a recovery”.

Kaushik isn’t concerned about those individuals who may not spend their rebate checks. “Americans typically don’t save. But even if some individuals apply these checks to their loans, this is a normal process – credit is the way we live. Sometimes we overdo it as a country and as individuals, but even if some people apply this against their loans, this then frees up that same amount in their credit lines and credit cards so then they can now spend that amount. Paying off loans has a psychological impact of having credit now available that wasn’t before.

Especially in this time of credit crunch, anything that creates a possibility of available credit is good”. However, Professor Kaushik believes that the impact of this program could have been greater. “One thing the government could have done, which they did not do, was to give immediate tax credits to anyone ling tax returns, instead of delaying the process by issuing checks. at would have encouraged individuals
to file their taxes sooner and would have put this money into our economy faster”. Kaushik also believes that the government should have utilized the Treasury Department, instead of the Internal Revenue Service, as the agency to implement this program. “ The Treasury operates in a ‘sending out’ mode, whereas the IRS operates in a ‘receiving mode’ – their objective is to collect money, not to give it out to the taxpayers!” he bemused. Kaushik believes this is why the IRS now needs taxpayers to provide their information so that they can receive their checks, information that the Treasury Department would already have in its system.

While Kaushik is encouraged with the economic stimulus potential of the tax rebate program, he is discouraged by the overall federal tax system and the potentially larger problems it creates. “Individuals with incomes lower than $25,000 pay less than 2% of the total income taxes collected in our country” Kaushik noted “Whereas, individuals with incomes between $100,000 and $500,000 pay over 38% of all
taxes”. This skewed tax burden, Kaushik feels, could eventually lead to a resurgence of the “no taxation without representation” sentiments, but in reverse – those paying the bulk of the federal taxes may feel that they are entitled to a greater say in government over those who pay little or nothing. “ e current attitude towards illegal immigrants and access to government benefits could extend to citizens,” Kaushik warns.
Like most financial issues, the ‘taxes’ to our economy are complicated and the impact of those taxes, hotly debated.

While the economic slowdown may indeed be slowed by these rebates, we have other looming economic and tax concerns as our local experts warned. Many of them recommended that our politicians and political candidates rethink their economic and political policies and ask what we really need to ‘change’ as a nation to resolve these problems.

Northern Westchester Round-Up

Bedford: The Bedford Central School District proposed a $118 million budget for the 2008-2009 school year. The proposed budget would increase property taxes by 10.7 percent. e district expects the school population to increase by over 100 students in the next school year.

Briarcliff Manor: Village Officials are planning a $17.3 million water project to access the Catskill water supply. The town expects the plan, which is still in the initial bidding process, to be completed in late 2009 or early 2010.

Mount Kisco: George Bubaris, the former Mt. Kisco police officer accused of causing the death of illegal immigrant, Rene Perez, has hired a new attorney to represent him. e new lawyer, Andrew Quinn, has indicated that his client will not accept a plea arrangement from the
District Attorney’s office.

North Salem: School board officials agreed to shorten the suspension of a student accused of possessing marijuana. The father of the
unidentified student had requested the help of school officials to deal with his son’s drug possession. The school had initially responded with a nine-week suspension for the student.

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