For weeks the debate raged between spenders – those who would prime the economy by pumping billions into public works – and reducers – those who would reduce or rebate taxes to open wallets. The spenders said the tax cuts wouldn't work because so many would try to replenish lost savings or bank against a lost job. Reducers said that billions in government dollars couldn't be spent quickly or prudently enough, and ultimately wouldn't help consumer-dependent Main Street stay afloat.
Well, now it's done: President Obama has signed a stimulus package that includes $575 billion in spending and $212 billion in tax cuts, the largest piece of the latter to be delivered in the form of “Making Work Pay” tax credits of up to $400 to individuals ($800 to families) in each of the next two years.
But will that tax credit perform as intended?
Here's the chance for policymakers to draw on some tried-and-true marketing wisdom and incentivize people to behave how we want them to. Yes, we should put taxpayers' money back in their pockets – but the kind they will spend, not save.
Let's call them Stimbucks. A Stimbuck is a form of refundable tax credit. But it avoids the pitfall of every traditional tax credit, which is to arrive in the form of a check or electronic bank deposit, where it will sit unless we decide to move it somewhere. Stimbucks, on the other hand, would arrive in the form of a debit card – which we're genetically disposed to spend. And here is where some fine-tuning pays off:
- Stimbucks come not only “shovel-ready,” but also with an expiration date of December 31. That all but ensures a more robust 2009 holiday shopping season.
- If things don't improve, their expiration can be extended. If things get worse, Congress could vote to increase the amount of Stimbuck spending, which would then be passed through instantly with a flip of a virtual switch and the swiping of cards across America.
- While deposited checks start costing the government interest right away, Stimbucks are interest-free until the moment they're spent.
- Want to target a particular sector in trouble? Then one Stimbuck can become two when spent on a car; or three (or ten) when used for a first-home down payment. And the consumer benefit occurs instantly upon purchase, not when the targeted tax credit refunds arrive months later.
- The immense economic infrastructure called Main Street can embrace Stimbucks, too – by having Stimbucks sales that leverage spending according to each merchant's means and competitive mettle.
- Individual states can choose to make Stimbucks sales-tax-free. They'll know just how much they stand to lose, and the sales can be electronically separated from regular ones.
Is it right for Uncle Sam to mint a “second class” of money to drive spending? Why not? We've done it before to incentivize the mirror-opposite form of behavior – savings – with US savings bonds.
It is not too late to cross the ideological divide and marry tax reduction and spending into a practical solution. Yes, we can deliver some serious change to every American – change they will consume with.
Peter Segall is MD of the Washington office of Edelman.