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How to Use Your Tax Rebate

Pay off your debts.

By Hobbes  |  April 21, 2008

As fears of recession swirl around and politicians run to and fro wanting urgently to look like they are "Doing Something," a lot of silly things happen.  One of the marginally less silly things taking place this time around is the concept of the Tax Rebate "to get the economy moving."

President Bush has made use of this technique to good effect in the past, and what worked once for him no doubt seemed like a good idea to call on twice.  The plan is to send money back to almost everyone who files taxes, varying in amounts from $600 to $1800 or more depending on your wealth and the size of your family.  It's not a tax refund; it's not a tax deduction; it's not taxable income.  No, it's supposed to be "money from heaven."

The idea as stated by the politicians and media, is for everybody to receive their check in the mail, and shout "Whoopee!  Let's go shopping!"  When that amount of money is dumped into our supposedly consumer-driven economy, sales will pick up, more goods will be ordered and manufactured, more employees hired... and shazzam!  Recession over.

But this scheme is ridiculous.  For one thing, what is this amount of money likely to be spent on?  It's certainly not enough to buy a car or any luxury goods.  Rich people who buy expensive things aren't exactly going to be motivated by a lousy extra grand.  The sort of person for whom this would make a significant impact is probably someone who shops at Wal-Mart and Target.

Now, those stores are certainly American, and they employ many thousands of Americans, but the overwhelming majority of the stuff they sell comes from the other side of the planet.  Yes, a huge chunk of the money the government is shoveling out - after borrowing it from the Chinese, thanks to the Chinese government courteously financing our national debt - is going to go directly back to... the Chinese.  How is this helpful?

Electronics?  Chinese.  Toys?  Chinese.  Clothes?  Chinese - well, maybe Pakistani.

The trouble with globalization is that everything is connected to everything else.  Even if you go shopping for the "Heartbeat of America - Today's Chevrolet", you'll find that a large chunk of your car comes from somewhere far away.  In fact, on the "Origin" sheets posted on cars to reveal this information, they often don't even bother distinguishing between the US and Canada, lumping them both into the same category.

We have nothing against our Canadian friends; we wish them well in their economy too.  But why should we be spending our tax dollars for their benefit?  Do not they have taxes of their own?

For the government to be giving back our own money is certainly a good thing.  Much, much more of that should be done - preferably by lowering taxes, in which we can keep more of our own money in the first place.  But for the stated purpose of reviving our economy, this is nothing more than an exercise in silliness.

What caused the economic problems in the first place?  That's generally blamed on the housing price bubble and the chaos in the mortgage markets when the bubble burst.

Too many banks unwisely lent money to people who could not afford to borrow it to buy houses that weren't worth what they paid, but nobody wants to talk about the pressure the government put on banks to increase their lending to members of politically-favored groups.  Now, the value of the mortgages held by banks and investors has plummeted and the banks are shy on capital.  If they don't have money to lend, they can't lend it, even to those who deserve loans they are able to repay.

And that leads us to something you can do with your tax rebate check that's both good for you, and good for the country: Pay off your debts.  Unlike toys from Wal-Mart, most of our consumer loans come from American banks.  If you pay back the money you owe, your bank will have more cash to lend to someone else - a growing business, perhaps, or a family who has saved to buy a home and wisely waited until the prices fell into a range they can afford.

What's more, you'll benefit doubly.  If we are entering into a prolonged recession, you'll be much better off without extra debt hanging over your head.  And if we aren't - well, you'll be much better off without extra debt hanging over your head.  You can't lose!

Paying off your debts and increasing your savings is good for you, good for other Americans, good for the banks, good for American businesses, and good for the country.  No wonder the politicians are telling us not to do that.