The Bush Administration announced the formation of a quick fiscal stimulus package of tax rebates for individuals and business tax incentives, but it is unclear what the impact will be even if it totals over $150 billion or 1 percent of GDP. The impact is that the reaction of consumers is unclear because it has already been suggested that the cuts will be temporary. The package may be higher than what was used in 2001.
The government's expectation is that the tax cuts will be used for new consumption but recent work from the CBO states that the last tax cuts of 2001 were used saved. Indeed, some of the tax cuts boosted consumptions but a good percentage was just put away in the financial mattress. This is expected by theory if the tax cut is viewed as temporary. If you think the tax cut will be one-time and you have high debt it seems more likely that it will be used to paydown debt or placed in a savings account. If that savings is not funneled back into the economy by banks, then there will be less overall stimulus.
The stock market is already thinking this. The reaction of equities on Friday was negative.
The government's expectation is that the tax cuts will be used for new consumption but recent work from the CBO states that the last tax cuts of 2001 were used saved. Indeed, some of the tax cuts boosted consumptions but a good percentage was just put away in the financial mattress. This is expected by theory if the tax cut is viewed as temporary. If you think the tax cut will be one-time and you have high debt it seems more likely that it will be used to paydown debt or placed in a savings account. If that savings is not funneled back into the economy by banks, then there will be less overall stimulus.
The stock market is already thinking this. The reaction of equities on Friday was negative.
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