The Tax Rebate: Spend Or Save?

Posted In: Advisers, Congress, Consumers, Credit Cards, Debt, Economy, Housing, Mortgages, Politicians, President Bush, Retirement, Stimulus Package, Taxes, U.S. Government

It’s official. Earlier today President Bush signed a $168 billion “economic stimulus” package that will extend rebates to American taxpayers, give tax breaks to businesses, and make more-expensive mortgages available through government and government-sponsored mortgage finance companies. Approved by lawmakers last week, the package provides a tax rebate of up to $1,200 per working couple, plus $300 per child. Businesses get tax breaks to invest in capital equipment. In addition, there are provisions to make more-expensive mortgages available through the Federal Housing Administration and government-sponsored enterprises Fannie Mae and Freddie Mac. According to MarketWatch reporter Robert Schroeder this afternoon:

Surveys show most consumers say they’ll save the tax-rebate money, or use it to pay down debts. Only a minority of consumers say they’ll spend it. To be an effective short-term stimulus to the economy this year, the money would have to be spent.

However, a number of groups and individuals are arguing that the tax rebate should be used to improve one’s finances instead. Financial columnist Eileen Ambrose said in the Chicago Tribune on February 3 that:

Consumers for years have done more than their share of propping up the economy. And what do we have to show for it? Steep credit card debt. Rising bankruptcies. More late payments on car and home equity loans.

Yet now, with the economy in danger, politicians are calling on consumers to spend more. They’re even planning to give us the cash to do it.

Instead of spending the tax rebate the government wants to send us, use it to improve your finances. Pay off high-rate credit card debt. Invest in a 529 college savings plan. Start an emergency fund. Salt away money for retirement. Do something that will leave you in better financial shape — not just for a week or month, but longer term.

Thomas Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants, the group which spearheads a savings campaign called “Feed the Pig,” said:

You listen to some people and it’s almost unpatriotic if you don’t take the money out and spend it right away. You can be patriotic and save the money.

Daniel Wishnatsky, an Arizona-based certified financial planner with Special Kids Financial, told Edward Gately of the East Valley Tribune (Arizona) on January 25 that:

It’s not patriotic to be in debt. You could argue that that’s why the markets are in the condition they are today. There’s really too much debt.

However, Ambrose said that using the rebate for other purposes is not what politicians want to hear. The rebate was meant to stimulate a slowing economy through consumption. Spend, spend, spend! David Wyss, chief economist for Standard & Poor’s, offered this advice to the country:

You need some to go out and spend money and eat more meals out and stop cooking for yourself.

However, according to Ambrose, Wyss admitted that if he were advising an individual, he would suggest using the money to pay off credit cards.

Joanna Smith-Ramani, director of the Baltimore CASH Campaign, which provides tax preparation and financial counseling for the type of workers the rebates are targeting, said:

What drives me most mad about this tax rebate is that it’s all about more consumerism. They are saying, “Buy, buy, buy.”

Maryland-based financial planner Peg Downey said the call to spend “infuriates her.” She warned, “It reinforces bad behavior. You’re training people to overspend.” Personally, I don’t believe additional training is needed when it comes to learning how to overspend. When it comes to buying things we can’t afford, Americans excel in that respect. In fact, it seems I’m not the only one who feels this way…


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