Tax cuts vs. tax rebates

Tax rebates – like those being discussed by US Congressional leaders – fail to stimulate the economy because they don't encourage productivity or wealth creation. No one has to work, save, invest or create any new wealth to receive a rebate, says Brian M. Riedl, the Grover M. Hermann Fellow at the Heritage Foundation.


  • Critics contend that rebates "inject" new money into the economy, increasing demand and therefore production.

  • But every dollar that government rebates "inject" into the economy must first be taxed or borrowed out of the economy (and even money borrowed from foreigners reduces net exports).

  • No new spending power is created; it is merely redistributed from one group of people to another.

    Take the 2001 tax rebates, for example:

  • Washington borrowed billions from the capital markets, and then mailed it to families in the form of $600 checks.

  • Predictably, consumer spending temporarily rose, and capital/investment spending temporarily fell by a corresponding amount.

  • This simple transfer of existing wealth did not encourage productive behaviour; the economy remained stagnant through 2001 and much of 2002.

    It was not until the 2003 tax cuts – which instead cut tax rates for workers and investors – that the economy finally and immediately recovered:

  • In the previous 18 months, business investment had plummeted, the stock market had dropped 18 per cent, and the economy had lost 616,000 jobs.

  • In the 18 months after the 2003 tax rate reductions, business investment surged, the stock market leaped 32 per cent, and the economy created 5.3 million new jobs; overall economic growth doubled.

    Thus, both economic theory and practice show the superiority of tax rate reductions over tax rebates, says Riedl.

    Source: Brian M. Riedl, Tax cuts vs. tax rebates, Washington Times, January 16, 2008.

    For text:

    For more on Taxes:

    FMF Policy Bulletin/ 22 January 2008
  • Help FMF promote the rule of law, personal liberty, and economic freedom become an individual member / donor HERE ... become a corporate member / donor HERE