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?