Comparing the Tax Cuts and Stimulus Packages

In the past, we’ve seen the government spend lots of money in attempts to jump-start the economy. Clearly they haven’t had the effect we would have hoped, and it all comes down to personal finance.

The stimuli introduced depend on the people to spend the money. If we all took the extra income and stuck it into our savings accounts, it would have no affect on the economy and it would be a waste of money from the government’s perspective.

When people receive a windfall, they spend it in unusual ways. Some spend part, save part, and hopefully give some to charity as well. However, all those transactions usually occur during a short period of time. When a sudden influx of cash occurs, it’s not surprising that we see abnormal spending habits.

Economic Stimulus Act

It’s possible that this is why the Bush stimulus package in 2008 was not successful. $600 was sent out to each person, and people likely saw this as a spike and made their decision how to spend it all at once rather than spreading it out and progressively putting that money back into the economy.

Marking Work Pay Credit

In 2009, Obama had a different plan and wanted to slowly give people the money, so he signed the Making Work Pay Credit that gave each person earning below $95,000 up to $400, but this time, it was spread out over the course of 9 months, and in 2010, over the course of 12 months.

I’m not willing to say it was all that successful, but I like the idea of the plan a little more. In theory, the money would trickle back into the economy and it would slowly but steadily have more money flowing.

Now, that strategy is again being employed, but on a larger scale and that will affect nearly everyone.

Payroll Tax Cut

This time, there will be no Making Work Pay Credit, and instead there will be the Payroll Tax Cut, which reduces the Social Security Tax from 6.2% down to 4.2%, which effectively puts 2% of each person’s paycheck back, up to the first $106,800 of income. Check out this great comparison of the Payroll Tax Cut vs. Making Work Pay Credit over at My Dollar plan. I couldn’t have said it better myself.

The plan again is to have that extra income trickle into the economy, but this time the effects will be larger for those making over $20,000. While the Making Work Pay Credit maxed out at $400, the Payroll Tax Cut can increase take home pay by over $2,000 for some people. Hopefully, the larger influx of money coming to most people will feed back into the economy and that by seeing the money in each paycheck as opposed to only once via a check, the economy will get the boost it needs.

Readers, do you think the Payroll Tax Credit will have the effect the government hopes? Do you favor one-time boost in cash or small changes over a longer period of time?

13 Responses to Comparing the Tax Cuts and Stimulus Packages

  1. MoneyCone says:

    I’m skeptical of one time cash boosts. Has it worked in the past? Difficult to say. Changes have to be more radical – getting people to spend more isn’t the answer. Level the playing field so we can compete with China.

  2. Noah says:

    I’m not sure it matters which way the money is distributed. Most people I know already have figured out where their yearly tax cut will be spent before it arrives.

    Bottom line is that those who will save the extra, will save either way and those who will spend it will be dumping it back into the economy. The extra 2% for me will be syphoned into my 401k.

    • Daniel says:

      @Noah, And if the savings rate increases, maybe as evan starts talking about below, maybe we won’t have as much of a need for social security in the future.

  3. I love the payroll tax cut. It goes straight to the consumer and it’ll help the economy, no question about it.

  4. Jenna says:

    I think the payroll tax cut will have some positives affects, however, I’m not entirely sure it will play out exactly how the government wants it too.

  5. Evan says:

    I know it isn’t the point of the post but I just want to be clear….we have a near bankrupt ponzi scheme known as social security…we know in the next couple years we have the biggest retiring generation ever…so what do we do? Cut those paying into the system?

    Fantastic stuff.

    • Daniel says:

      @Evan, It’s definitely a tough situation. What can we do, stop paying into it now? The boomers will have nobody to pay them. Keep going? I’m not sure I trust it will be there, especially at 100%. Why “invest” when I’m hoping to get a negative return. Let me handle my money.

      We can always add to the defecit, it seems like nobody really has a problem with that…

  6. Briana @ GBR says:

    Honestly I’m not sure that this will have that different of an effect than the stimulus package. Yeah it may encourage more spending as people see more money on their paychecks, but for the people who do know about it, they could be designating that money for savings just like they did with the stimulus.

    • Daniel says:

      True, I’m definitely going to be saving that extra money. That’s good PERSONAL finance, which the government doesn’t encourage. They prefer spending.

  7. N.W.Journey says:

    I agree with Noah that the minds of the people are already made up and whatever the government comes up with may not make a significant difference as a result. Those that have decided it’s time to save big will continue to do so, and the spenders will spend.

  8. krantcents says:

    Although I am ineligible, I believe it will be a beneficial stimulus. I feel this way because you will receive the 2% in each check. I expect it will be spent on higher gas or food prices as an example.

  9. Carrie#K says:

    I think no one will even notice the payroll tax cuts in their paycheck, but they’ll spend it incrementally, as usual. In the meantime, inexperienced bookkeepers or small business owners will gnash their teeth in frustration trying to keep up the with the changing forms and social security will continue to topple over the cliff, taking with them those that lack the most security in the first place, the disabled, the young, the uneducated.

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