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Weighing The Impact Of A Possible Tax Rebate

Hear Rep. Barney Frank (D-MA) on the White House and Democratic Stimulus Proposals

With fears of a recession rising and the stock market tumbling, President Bush on Friday called for up to $150 billion in tax relief for consumers and business — and said there was no time to waste. Most observers expect that relief to take the form of tax rebate checks that will put money in the hands of consumers willing to spend. But it's not yet clear how much the checks will be for, or who will qualify for them.

The rebates would be designed as a one-time boost for a national economy that is in danger of sliding into the first recession since 2001, if it hasn't already edged across that line.

But some economists warn about potential pitfalls. Once the federal government opens up the floodgates of spending, it may be difficult to rein it in – especially in an election year. Another potential sticking point is that Americans may not spend their rebates. Putting the rebates in savings accounts, for example, would have no stimulating effect.

John Leahy, a professor of economics at New York University, says it is theoretically possible that a tax rebate will indeed stimulate the economy. But other economists are skeptical that a stimulus package will work.

There is also the question of who would get the rebate checks. Democrats want to target rebates to the most "economically stressed," says Democratic Rep. Barney Frank of Massachusetts. Republicans are looking for broad-based tax relief. In remarks to reporters after Bush's speech, Treasury Secretary Henry Paulson said a rebate should be "broad based" and benefit "those paying taxes."

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Adam Davidson
Adam Davidson is a contributor to Planet Money, a co-production of NPR and This American Life. He also writes the weekly "It's the Economy" column for the New York Times Magazine.