Economic Stimulus Act of 2008

Economic Stimulus Act of 2008

With the subprime crisis looming, the Bush Administration signed into law the Economic Stimulus Act of 2008 on February 13, 2008. The act had three main components - tax rebates for individuals, tax cuts for businesses and increases in the limits for mortgages eligible for purchase by Fannie Mae and Freddy Mac. Individuals received the bulk of the benefit of this bill. The IRS determined the rebates based on the 2007 tax return. The structure of the bill was unusual in that it basically represented a tax cut, but instead of giving the money on the 2008 tax refund a year later, the government gave it out in cash in 2008. On the business side, the tax breaks related mainly to depreciation expense. New rules with respect to depreciation allowed companies to reduce their net incomes for the year, thereby also reducing their tax burden. The Fannie and Freddy limits were a response to the subprime issue and more or less unrelated to the issue of stimulus.

In a roundabout way, the 2008 Economic Stimulus Act was an act of fiscal policy. Fiscal policy pertains to government policies that influence the economy on a macroeconomic level. Typically, tax policy is included in fiscal policy because it pertains directly to the money supply. In this case, the tax rates did not change, but the stimulus was billed a tax rebate. Tax rebates are a tool that functions the same as a decrease in tax rates, but can be used on a one-time basis. Given the negative optics of lowering rates for a year then returning them the next year to the previous level, it is reasonable that a rebate be used as a form of tax policy.

Certainly the new rules regarding depreciation are tax policy and as with the stimulus checks are designed to increase spending levels, putting more money into the system.

The intent of the act was to increase spending by increasing the amount of money consumers and businesses had to spend. The theory was that by giving consumers tax rebates, aggregate demand could be increased. This in turn would, along with the corporate tax cuts, give firms more confidence to increase their own spending. When the bill was being drafted, the economy was not yet in a state of total devastation, but there were signs of a pending recession. By drafting a bill that would increase aggregate demand, it was hoped by that business cycle could be forestalled or reversed. The government did not view recession as inevitable at the time. Rather, they felt that with sufficient increase in aggregate demand, the recession could be averted. As we have seen, the recessionary conditions at the outset of 2008 were merely the tip of the iceberg and the stimulus package was therefore woefully inadequate.