Posted by: Kenn Hermann | February 8, 2008

Be a Rebel! Save Your Tax Rebate Check!

Now that the Senate has fallen in line with the House and the President’s desire to ‘stimulate’ the economy, we can all sit back and wait for those generous checks to arrive in the mail in May. How wonderful! The theory of a consumer-driven economy is that consumers are not spending enough to keep the economy growing and healthy. Shame on us! However, since our wages are stagnant or even falling behind, we don’t have any of our own money to spend. So, the ‘good fellas’ that they are, the president and congress have decided that they must step into the breach and encourage/goad/lure/tempt us by giving us an extra boost of cash. Out of deep gratitude for their generosity — and to make ourselves feel good — we will head straight to the mall and buy more stuff. When we all obediently do that, we will ‘stimulate’ economic activity all of the way from the local mall to factories in China. Business activity will increase; revenues will grow; taxes will roll in. Economic well-being will be restored.

That’s the theory. Of course, reality rarely conforms to the theory. But no matter, with such a deep ideological commitment to the virtues of consuming, all other avenues of exit for restoring health to the economy are closed off. Deep down the politicians know that it is unlikely that buying more stuff at Best Buy will ‘stimulate’ the economy. As even the Wall Street Journal has noted, the only thing this ‘stimulus’ package is hoped to stimulate is the political fortunes of representatives and senators who voted for it.

Of course, what the President and Congress haven’t told us is how they will pay for their generosity. Where do they intend to get 160 billion dollars to fund these ‘generous’ checks? When I have asked my students, they seem to believe that this is ‘free’ money that is gathering dust in the bank or, more cynically, that they will just print more money. Neither view is accurate. We know that the treasury, in fact, has been running a serious deficit measured in the trillions of dollars (can any of us wrap our minds around how much money a TRILLION dollars is??). So, if you think the government is going to send you some of ‘your’ money, think again.

To make up that short-fall, the government must borrow money, like citizens who buy treasury bonds and other debt instruments. Increasingly, however, the government (and now the corporate world) has relied on foreign governments and corporations who are flush with cash (think petro-dollars and cheap consumer products) and looking for investment opportunities in the U.S. economy to buy our debt. These national governments will be standing in line to bid on the 160 billion dollar debt that the congress will incur when it starts sending out their ‘generous’ checks to you.

Just as Visa doesn’t lend you money for ‘free,’ neither do other nations lend the U.S. money for ‘free.’ They will expect a safe, secure, and competitive return on what they see as their investment (but becomes our debt). Already the federal budget has to set aside roughly 20% of its revenue to pay for the interest on what it has borrowed already. That’s like an individual paying the minimum each month on their Visa bill while continuing to spend more each month. We know where that leads in personal finances.

Even if the government were to get a special deal of 0% on a transfer balance to another sovereign market fund during the life of the debt, there would still be an enormous debt burden. Does your calculator display enough zeros to show how much a simple annual interest rate of just 3% would be on 160 billion dollars for 10 years? How many decades into the future will you and future generations have to work in a productive economy to pay for these tax rebate checks? Can you say ‘shell-game’ or ‘ponzi scheme’?

In light of this glaringly irresponsible ‘stimulus’ package, I intend to rebel against the consumer mantra of spend, spend, spend. How morally responsible is it for me to ask my granddaughter to pay much higher taxes in the future so that I can enjoy lower taxes and a shopping spree today? On how many generations down the line can we off-load our debts? When the bill for this ‘generous’ loan comes due, taxes will have to be raised or serious spending cuts will be required. There is no way around it: congress is committing future generations to pay for its ‘generosity’ to my generation. My children and their children’s children will be forced to pay for the government’s borrowed funds today. (We are already asking them to pay for the off-budget Pentagon spending for the war in Iraq and Afghanistan.) So, the least I can do for my heirs is to invest my check in a treasury bond for them so that they have a little cash to defray the tax expense they will have. You should do the same.

. . . another option is donating your check to a worthy charity.

Even though Suzie Orman’s personality can be a little difficult to tolerate at times, she can always be counted on to give thoughtful and sound financial advice. See her latest column on what to do with your rebate check.

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