OVERVIEW OF PAST TAX LEGISLATION PROVIDING 

FISCAL STIMULUS AND ISSUES IN DESIGNING AND 

DELIVERING A CASH REBATE TO INDIVIDUALS 

Scheduled for a Public Hearing 

Before the 

SENATE COMMITTEE ON FINANCE 

on January 22, 2008 and January 24, 2008 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

 

February 13, 2008 

JCX-4-08R
CONTENTS 

Page

I. INTRODUCTION AND SUMMARY............................................................................... 1 

II. PAST TAX LEGISLATION PROVIDING FISCAL STIMULUS.................................... 6 

A. Individual Income Tax Provisions................................................................................ 6 

1. Cash rebates............................................................................................................ 6 

2. Reduction in individual tax rates............................................................................ 7 

3. Increase in standard deduction................................................................................ 8 

4. Increase in dependent exemptions and child tax credits....................................... 10 

5. Earned income credit (“EIC”)............................................................................... 12 

6. Individual credit for FICA taxes........................................................................... 13 

7. Reduced rates for capital gains and dividends of individuals............................... 13 

B. Business Income Tax Provisions................................................................................ 14 

1. Depreciation.......................................................................................................... 14 

2. Investment Tax Credit........................................................................................... 17 

3. Section 179 Expensing.......................................................................................... 18 

4. Net Operating Losses............................................................................................ 19 

5. Reduction in Corporate Income Tax Rates........................................................... 19 

C. Purchase of New Principal Residence ........................................................................ 21 

III. ECONOMIC EVIDENCE OF EFFICACY OF FISCAL STIMULUS THROUGH 

 TAX POLICY................................................................................................................... 22 

A. Economic Evidence on the Efficacy of Stimulative Fiscal Policy ............................. 22 

B. Evidence Related to Individual Income Provisions.................................................... 23 

C. Evidence Related to Business Income Provisions...................................................... 30 

1. Bonus Depreciation and Expensing...................................................................... 30 

2. Investment Tax Credit........................................................................................... 31 

3. Corporate Tax Rate Reductions............................................................................ 32 

IV. DESIGN ISSUES IN IMPLEMENTING A CASH REBATE TO INDIVIDUALS ....... 34 

A. Recent Cash Rebates................................................................................................... 34 

B. Design Issues .............................................................................................................. 36 

1. Overview............................................................................................................... 36 

2. Policy goal of who should receive the stimulus rebates....................................... 36 

3. Administrative capabilities of IRS, SSA and FMS............................................... 42 

4. Designing a tax-based rebate in light of administrative constraints..................... 46 

i 
I. INTRODUCTION AND SUMMARY 

A number of policy makers and economists have expressed concern that the rate of 

growth of the U.S. economy is slowing and that a significant economic downturn, or recession, 

may lie ahead. While no precise definition of “recession” exists in economics, variables 

commonly examined to identify whether the economy is in recession are the rate of growth of 

real gross domestic product (GDP), the unemployment rate, the capacity utilization rate, the 

inflation rate, and interest rates.1 When the rate of growth of GDP is low, or negative, and when 

unemployment increases and capacity utilization decreases, policy makers often consider 

adopting fiscal stimulus policies. Typically, these policies are intended to increase demand for 

goods and services either by individuals, businesses or governments. 

 The Senate Committee on Finance has scheduled hearings for Tuesday, January 22, 

2008, and for Thursday, January 24, 2008, to hear testimony on “Strengthening America’s 

Economy: Stimulus That Makes Sense.” In response to past economic slowdowns or 

downturns, the Congress has made changes in tax laws to provide fiscal stimulus. This 

pamphlet2 reviews a number of the tax tools the Congress has chosen in the past as part of 

stimulative fiscal policy, reviews some of the available economic evidence related to the efficacy 

of such tax tools, and discusses design issues with respect to proposals to pay cash rebates to 

taxpayers. 

Past legislative proposals

 The U.S. economy experienced periods identified as recessions beginning in 1960, 

1970, 1974, 1980, 1982, 1990, and 2001. While Congress often has multiple policy goals when 

it passes tax legislation, many analysts identify tax bills passed in 1962, 1964, 1971, 1975, 1981, 

1992,3

 2001, 2002, and 2003 as attempts to stimulate the economy. The Congress has crafted 

tax reduction provisions for both individuals and businesses in its past efforts to stimulate the 

economy. Below is a selection of provisions passed by the Congress in these past bills. 

 1

 The oft cited definition of two consecutive quarters of decline in real GDP represents a fairly 

accurate description of a rule of thumb used by economists to identify recessions. 

2

 This document may be cited as follows: Joint Committee on Taxation, Overview of Past Tax 

Legislation Providing Fiscal Stimulus and Issues in Designing and Delivering a Cash Rebate to 

Individuals, (JCX-4-08R), February 13, 2008. A previous version of this document was released on 

January 21, 2008. The present revision revises and clarifies the discussion of Tables 6, 7, and 8. This 

revision also corrects a factual error contained in footnote 90 of the previous version. The JCT Staff 

regrets the error. This document can also be found on the web at www.house.gov/jct. 

3

 The stimulus legislation passed by Congress in 1992 (H.R. 4210) was vetoed by the President. 

1 
Table 1.–Stimulus Targeted at Individuals 

Type of Provision Year 

Cash Rebates........................................................... 1975, 2001, 2003 

Increase in standard deduction................................ 1971, 1975, 2001 

Increase dependent exemptions or credits .............. 1971, 1975, 1992,* 2001, 2003 

Reduce individual tax rates..................................... 1964, 1975, 1981, 2001, 2003 

Increase in the earned income tax credit................. 1975, 1992,* 2001 

Provide an individual credit for FICA taxes........... 1992* 

Reduce tax rate applicable to income from 

capital gains ............................................................ 1981, 2003 

Reduce tax rate applicable to dividend income ...... 2003 

Table 2.–Stimulus Targeted at Business 

Type of Provision Year 

Reduce corporate income tax rates ....................... 1964, 1981 

Provide an extended carry back or carry over 

for net operating losses ......................................... 1981, 2002 

Provide an investment tax credit........................... 1962, 1971, 1975, 1981 

Modify depreciation schedules ............................. 1962, 1971, 1981, 1992,* 2002, 2003 

Expand expensing permitted under sec. 179......... 1992,* 2003 

* - 1992 legislation was passed by the Congress but vetoed by the President. 

A number of analysts have pointed to recent problems in the markets for mortgage 

finance and weakness in the housing sector as significant factors behind current concerns related 

to the aggregate economy. There were similar concerns in 1975 and as part of the 1975 tax 

legislation the Congress provided a credit available to individuals for the purchase of a new 

home. 

Economic evidence relating to the efficacy of tax policy as short run fiscal stimulus

A tax reduction has two avenues by which it can affect the economy. By reducing tax 

liabilities a tax reduction is similar to a “lump sum” transfer of income from the government to 

the taxpayer. When a tax reduction reduces marginal tax rates or alters the after-tax return to 

investment, it changes incentives of taxpayers to work and invest. A lump sum transfer of 

income from the government to the taxpayer can act as a fiscal stimulus if taxpayers respond to 

2 
the increase in income by increasing their consumption. A tax reduction that reduces marginal 

tax rates or alters the after-tax return to investment can act as a fiscal stimulus if taxpayers 

respond to the tax reduction by increasing their demand for investment goods. 

Studies of the 1975, 2001 and 2003 tax rebate proposals generally have found that the 

rebates provided modest stimulus to consumption. The studies varied in their estimates as to the 

portion of the rebates that were consumed in the short run, ranging from around one third to two 

thirds of the amount of the rebates. While there is a large literature on the impact of marginal 

rate reductions on savings and labor supply, such policies are designed mainly as long term 

policy changes designed to affect long run growth. Rigorous empirical evidence for the overall 

macroeconomic effect of individual stimulus incentives is hard to obtain. Macroeconomic 

modeling, such as that done by the staff of the JCT,4

 generally has found modest short run 

stimulative effects of policies similar to rebates (such as an increase in exemption levels), or 

policies lowering marginal tax rates. 

Several studies suggest that bonus depreciation, enhanced expensing provisions, and the 

investment tax credit generally have had modest effects on overall levels of investment, though 

there is some evidence that the composition of investment may be responsive to such provisions. 

In addition, the investment tax credit may have had destabilizing effects on the economy, 

encouraging companies to delay investment during slowdowns and providing stimulus when the 

economy was already in recovery. Empirical evidence on the effect of corporate income tax rate 

changes is scant, but economic models suggest that while these reductions may encourage 

investment in the short run, they have the greatest effect on long term growth. 

Design issues in designing and delivering a cash rebate for individuals

With more than 136 million individual income tax returns filed annually, and even more 

individuals paying Social Security tax contributions on their wages, taxpayer information 

constitutes a substantial database from which to fashion a cash rebate to individuals. In practice, 

income tax returns provide the most comprehensive available database of current economic and 

personal information about individuals to use in designing a rebate. By using income tax return 

information, policy makers, should they choose to, can fine tune who receives a rebate, or 

determine how large the rebate is. For example, policy makers could decide to deny rebates to 

dependent children, to limit the rebate in relation to a taxpayer’s income, or to increase the rebate 

for families. Tax return information provides the data needed to implement these decisions. 

Unfortunately, neither the Social Security Administration (SSA) nor the Internal Revenue 

Service (IRS) has accurate personal information, such as addresses, relating to those individuals 

who make Social Security contributions with respect to their wages, but who do not file income 

tax returns (because, for example, their income is below the relevant threshold), unless (as in the 

case of some working seniors) they also currently are receiving Social Security benefits. 

Moreover, neither system collects comprehensive current data on the unemployed, if they have 

 4

 Joint Committee on Taxation, Macroeconomic Analysis of Various Proposals to Provide $500 

Billion in Tax Relief, (JCX-4-05), March 1, 2005. 

3 
no other source of income. The tax system data collected tends not to encompass the very 

lowest-income Americans. Cash stimulus payments aimed at them may be more effectively 

designed through current programs such as food stamps, unemployment insurance, and the SSI 

program. 

In addition to the policy questions of who should receive a cash stimulus payment, and 

how much those payments should be, there are four main practical design issues to consider 

when formulating an income-tax based rebate: (1) how to provide for the most timely delivery 

of the rebates to intended beneficiaries; (2) how to accurately deliver the rebates to intended 

beneficiaries; (3) how to minimize taxpayer opportunities to modify behavior to manipulate the 

system to obtain rebates for unintended beneficiaries; and (4) whether a system to check for 

errors of omission in targeting rebates to intended beneficiaries should be used. These practical 

considerations to date appear to have received less attention than the larger policy questions, but 

in many cases these practical issues determine what policies can actually be implemented in a 

timely manner. 

Very generally, the analysis developed in this pamphlet suggests that, if a tax-based cash 

stimulus payment is desired, that payment, should be based at least initially on information 

contained in individuals’ 2007 tax returns, except in one case. If policy makers wish to provide 

rebates for all individuals who file returns, without limitation to the amount of their respective 

tax liabilities, then it would be important to base that program on 2006 income tax returns, 

because the filing season for that year is now complete. If, by contrast, one were to base such 

rebates on 2007 filing information, then, since we are now in the middle of the 2007 filing 

season, the expected consequence would be a very large number of returns being filed solely for 

the purpose of obtaining that rebate. 

The IRS’s systems are today fully engaged in processing 2007 tax returns. As a result, it 

is not practical to contemplate distributing cash rebates until the peak filing season is completed, 

which in past years has been the very end of May. Moreover, this systems constraint cannot be 

avoided by basing a 2008 rebate on 2006 filed returns. The JCT Staff has not been able to 

identify an agency of the Federal government that could deliver tax-based rebates in 2008 more 

quickly than could the IRS. Even this schedule would require a great deal of work by the IRS, as 

it would need (among other steps) to develop a specific processing system to compute and 

distribute the rebates between the date legislation is enacted and the end of the 2007 filing 

season. 

Once the IRS begins processing the data in the individual tax records to compute 

individuals’ entitlements to rebates, the Federal government faces a processing constraint in the 

delivery of paper checks. Available check processing capacity in the Federal government 

probably limits delivery to no more than nine million checks per week. (This same constraint 

explains why the 2001 rebate stretched out over roughly 10 weeks.) If a rebate based on 2007 tax 

returns is implemented in the near future, then roughly 40 million individuals can be expected to 

be eligible to receive their rebates through electronic direct deposit. This would accelerate the 

average delivery date for rebates by several weeks, when compared to 2001, even if the first 

paper check were to be issued at the same time of the year as in 2001. 

4 
To the extent a rebate system has imperfect targeting and delivery, because, for example, 

taxpayers whom policy makers wish to reach were not reflected in the base year’s returns, policy 

makers may want to consider whether to allow eligible persons who meet the relevant standards 

in 2008 (but not in the base year) to receive the funds when filing their 2008 return, which will 

occur in 2009. Such a “true-up” system is likely to be perceived by some as more equitable than 

not having such a system. (Conversely, the “true-up” systems implemented in 2001 and 2003 

effectively gave taxpayers rebates determined as the “better of” either of two tax years, which 

arguably raises different equity issues.) A true-up system adds complexity to the Code and may 

be thought to partially violate the goal of providing timely stimulus, because beneficiaries of the 

true-up system would not obtain their payments until 2009. 

5 
II. PAST TAX LEGISLATION PROVIDING FISCAL STIMULUS 

A. Individual Income Tax Provisions 

Congress has responded to past economic slowdowns with a variety of tax changes for 

individuals to provide fiscal stimulus. Among these changes have been cash rebates, changes in 

individual income tax rates, increases in exemptions and child tax credits, earned income credit, 

reductions in the rates for capital gains and dividends of individuals, and other changes, a 

number of which are described below. 

1. Cash rebates 

The Tax Reduction Act of 1975,5

 enacted on March 29, 1975, provided for a refund of 

1974 tax liability in a single installment beginning in May 1975. The amount of the refund was 

equal to 10 percent of an individual’s tax liability, up to a maximum refund of $200.6

 Each 

taxpayer received a refund of at least $100 (or the full amount of the taxpayer’s actual tax 

liability if it was less than $100). The refund was phased down from the maximum of $200 to 

$100 as the taxpayer’s adjusted gross income rose from $20,000 to $30,000. The amounts of 

these refunds were not considered income or resources for purposes of determining eligibility for 

benefits or assistance (or the amount of the benefits or assistance) under any Federal or federally 

assisted program. 

The Economic Growth and Tax Relief Reconciliation Act of 20017 (“EGTRRA”), 

enacted on June 7, 2001, created a new 10-percent regular income tax bracket for a portion of 

taxable income that was previously taxed at 15 percent.8

 This change was effective for taxable 

years beginning after December 31, 2001. For 2001, a tax credit equivalent to the value of the 

rate reduction operated in lieu of the new 10-percent income tax rate bracket. Most taxpayers 

received the credit in the form of a check issued by the Department of the Treasury and 

calculated on the basis of each taxpayer’s 2000 income tax liability (determined after 

nonrefundable credits). The first checks were issued to taxpayers in July 2001, and most 

taxpayers received a check by October 1, 2001. When taxpayers filed their 2001 returns, they 

reconciled the amount of the credit with the check and received any excess credit; if the check 

received by a taxpayer exceeded the amount of the taxpayer’s credit, the taxpayer was permitted 

to keep the excess. 

 5

 Pub. L. No. 94-12 (1975). 

6

 Approximately $770 in 2007 dollars. 

7

 Pub. L. No 107-16 (2001). 

8

 The new 10-percent regular income tax bracket is repealed for taxable years beginning after 

December 31, 2010, under the sunset provision of EGTRRA. 

6 
The Jobs and Growth Tax Relief Reconciliation Act of 20039

 (“JGTRRA”), enacted on 

May 28, 2003, increased the amount of the child credit from $600 to $1,000 for 2003 and 2004. 

For 2003, the increased amount of the child credit was paid in advance beginning in July 2003, 

on the basis of information on each taxpayer’s 2002 return filed in 2003. The payments were 

made in a manner similar to the advance payment checks issued by the Treasury Department in 

2001 under EGTRRA, with the first checks being issued to taxpayers in July 2003. 

2. Reduction in individual tax rates 

The Revenue Act of 196410 (the “1964 Act”), enacted on February 26, 1964, reduced the 

individual tax rates from a range of 20 to 91 percent to a range of 16 to 77 percent for 1964 and 

to a range of 14 to 70 percent for 1965 and subsequent years. Beginning in 1965, the 1964 Act 

also split the first bracket into four segments of $500 each, taxed at 14, 15, 16, and 17 percent, 

respectively. 

The Economic Recovery Tax Act of 1981,11 enacted on August 13, 1981, provided 

cumulative across-the-board reductions in individual income tax rates of 1.25 percent in 1981, 10 

percent in 1982, 19 percent in 1983, and 23 percent in 1984 and subsequent years.12 These tax 

reductions were reflected in reductions in withholding on October 1, 1981, July 1, 1982, and 

July 1, 1983. The top marginal tax rate on unearned income was reduced from 70 percent to 50 

percent beginning January 1, 1982. 

As noted above, EGTRRA created a new 10-percent regular income tax bracket for a 

portion of taxable income that had previously been taxed at 15 percent, effective for taxable 

years beginning after December 31, 2001.13 In addition, the prior-law regular income tax rates 

of 28 percent, 31 percent, 36 percent, and 39.6 percent were phased down over six years to 25 

percent, 28 percent, 33 percent, and 35 percent, effective after June 30, 2001.14 Accordingly, for 

taxable years beginning during 2001, the rate reduction came in the form of a blended tax rate. 

 9

 Pub. L. 108-27 (2003). 

10 Pub. L. 88-274 (1964). 

11 Pub. L. 97-34 (1981). 

12 The Economic Recovery Tax Act of 1981 also indexed the income tax brackets, zero-bracket 

amount, and personal exemption for increases in the consumer price index, starting in 1985. The first 

adjustment, for 1985 tax returns, was based on price increases between fiscal year 1983 and fiscal year 

1984. 

13 The size of the 10-percent bracket would have increased in 2008 for single individuals and 

married couples filing joint returns. In addition, all of the taxable income levels of the 10-percent bracket 

would have been adjusted for inflation for taxable years beginning after December 31, 2008. 

14 The regular income tax rate reductions, as well as the new 10-percent regular income tax 

bracket, are repealed for taxable years beginning after December 31, 2010, under the sunset provision of 

EGTRRA. 

7 
The taxable income levels for the reduced rates above the 15-percent rate in all taxable years 

were the same as the taxable income levels that applied under the prior-law rates. 

Table 3, below, shows the EGTRRA schedule of regular income tax rate reductions. 

Table 3.–Regular Income Tax Rate Reductions 

Calendar Year 

28% rate 

reduced to 

31% rate 

reduced to 

36% rate 

reduced to 

39.6% rate 

reduced to 

200115-2003 27% 30% 35% 38.6% 

2004-2005 26% 29% 34% 37.6% 

2006 and later 25% 28% 33% 35% 

The Secretary of the Treasury made appropriate revisions to the wage withholding tables, 

effective July 2001, to reflect the rate reductions that were also effective beginning July 1, 2001. 

JGTRRA fully phased in the EGTRRA regular income tax rate reductions for 2003 

through 2005, so that, for 2005-2010, the regular income tax rates in excess of 15 percent are 25 

percent, 28 percent, 33 percent, and 35 percent. JGTRRA also accelerated, for 2003, the 

increase in the size of the 10-percent bracket that was scheduled to be effective in 2008, and, for 

2004, the inflation adjustment that was scheduled to be effective in 2009.16

3. Increase in standard deduction 

The 1964 Act created, as an alternative to the then present-law 10-percent standard 

deduction amount, a minimum standard deduction amount so as to provide additional tax relief 

to lower-income taxpayers. The minimum standard deduction amount was $200 plus $100 for 

each exemption claimed. The 10-percent standard deduction amount was equal to 10 percent of 

adjusted gross income, but could not exceed $1,000.17

 15 Effective July 1, 2001. 

16 The Working Families Tax Relief Act of 2004, Pub. L. No. 108-311 (“WFTRA”), enacted on 

October 4, 2004, increased the size of the 10-percent bracket for 2005-2010. Specifically, WFTRA set 

the size of the 10-percent bracket for 2005-2010 at the 2003 level with annual indexing from 2003. 

17 For a single person, the minimum standard deduction amount was $300 ($200+$100), which, 

when combined with an exemption of $600, meant that a person could earn up to $900 with no tax 

liability; in contrast, under the 10-percent standard deduction, a single person could earn only up to $667 

with no tax liability (a standard deduction of 10 percent of income ($67) plus a $600 exemption). A 

married couple, under the minimum standard deduction, could earn up to $1,600 with no tax liability (a 

minimum standard deduction of $400 ($200+$100+$100) plus two exemption amounts ($600+600)); 

under the 10-percent standard deduction, a married couple could earn only up to $1,333 with no tax 

liability (a standard deduction of 10 percent of income ($133) plus two exemption amounts ($600+$600)). 

8 
The Revenue Act of 1971,18 enacted on December 10, 1971, increased the low-income 

allowance by $300, to $1,300, for 1972 and thereafter.19 The Act also accelerated to 1972 a 

permanent increase in the percentage standard deduction to 15 percent of adjusted gross income 

that was scheduled to go into effect in 1973.20

The Tax Reduction Act of 1975 increased for 1975 (1) the low-income allowance from 

$1,300 (for both single individuals and married couples filing joint returns) to $1,600 for single 

individuals and to $1,900 for married couples filing joint returns, (2) the percentage standard 

deduction from 15 percent to 16 percent, and (3) the percentage standard deduction ceiling from 

$2,000 (for single and joint returns) to $2,300 for single returns and to $2,600 for joint returns.21 

The Tax Reduction Act of 1975 provided that the changes in the standard deduction were to be 

reflected in lower withholding and estimated taxes for the last eight months of 1975. 

EGTRRA increased the basic standard deduction for a married couple filing a joint return 

to twice the basic standard deduction for an unmarried individual filing a single return.22 The 

basic standard deduction for a married taxpayer filing separately is one-half of the basic standard 

deduction for a married couple filing jointly; consequently, the basic standard deduction for 

unmarried individuals filing a single return and for married couples filing separately is the same. 

Under EGTRRA, the increase in the standard deduction was phased in over five years 

beginning in 2005, and thus is fully phased in for 2009 and thereafter. 

 18 Pub. L. No 92-178 (1971). 

19 The Tax Reform Act of 1969, Pub. L. No. 87-274, enacted on December 30, 1969, had 

replaced the minimum standard deduction amount with a new “low-income allowance” of $1,000 for 

1972 and thereafter. 

20 The Tax Reform Act of 1969, Pub. L. 82-274, had increased the percentage standard deduction 

from 10 percent with a $1,000 ceiling to 13 percent with a $1,500 ceiling in 1971, to 14 percent with a 

$2,000 ceiling in 1972, and to 15 percent with a $2,000 ceiling for 1973 and thereafter. The Revenue Act 

of 1971 did not alter the percentage standard deduction ceiling, which was already set at $2,000 for 1972 

and thereafter. 

21 The Revenue Adjustment Act of 1975, Pub. L. No. 94-164, enacted on December 23, 1975, 

extended, for the first half of 1976, the increase in the percentage standard deduction from the Tax 

Reduction Act of 1975; it also increased, for the first six months of 1976, (1) the percentage standard 

deduction ceiling, on a full-year basis, to $2,400 for single returns and to $2,800 for joint returns and (2) 

the low-income allowance, on a full-year basis, to $1,700 for single returns and to $2,100 for joint returns. 

The Tax Reform Act of 1976, enacted on October 4, 1976, made the increases permanent, thus making 

the increases effective for 1976 and subsequent years. 

22 The basic standard deduction increases are repealed for taxable years beginning after 

December 31, 2010, under the sunset provision of EGTRRA. 

9 
JGTRRA fully phased in the EGTRRA increase in the basic standard deduction for a 

married couple filing a joint return for 2003 and 2004.23 For 2005 and thereafter, the basic 

standard deduction amount for a married couple filing a joint return would have reverted to the 

amount provided under the EGTRRA phase-in.24

4. Increase in dependent exemptions and child tax credits 

The Revenue Act of 197125 increased the personal exemption amount from $650 to $675 

in 1971 and to $750 for 1972 and subsequent years. 

The Tax Reduction Act of 1975 provided a nonrefundable credit of $30 for each taxpayer 

and dependent for 1975. The Act also provided that the change in the general tax credit was to 

be reflected in lower withholding and estimated taxes for the last eight months of 1975.26

The Tax Fairness and Economic Growth Act of 1992 would have provided a 

nonrefundable $300 income tax credit (indexed for inflation) for each qualifying child of the 

taxpayer for taxable years beginning in 1994 and thereafter.27 For purposes of this credit, a 

“qualifying child” was defined as a child under age 16 who resided with the taxpayer for more 

than six months during the taxable year. The credit would have been phased out ratably for 

taxpayers with adjusted gross income between $50,000 and $70,000 (the phase-out range was 

not adjusted for inflation). 

 23 Comparing the standard deduction amounts for 2002, the last year before the increase became 

effective, and 2003, the first year that the increase was effective, allows one to see the effect of the 

increase. In 2002, an individual filing a single return could claim a standard deduction of $4,700, while a 

married couple filing a joint return could claim a standard deduction of $7,850 (approximately 167 

percent of the amount an individual filing a single return could claim). In 2003, an individual filing a 

single return could claim a standard deduction of $4,750, while a married couple filing a joint return 

could claim a standard deduction of $9,500 (200 percent of the amount an individual filing a single return 

could claim). 

24 WFTRA fully phased in the EGTRRA increase in the basic standard deduction for a married 

couple filing a joint return for 2005-2008. 

25 Pub. L. 92-178 (1971). 

26 The Revenue Adjustment Act of 1975 extended and increased the credit for the first half of 

1976, on a full-year basis, to the greater of $35 or two percent of the first $9,000 of taxable income. The 

Tax Reform Act of 1976 extended the increased credit through 1977. 

27 H.R. 4210, the Tax Fairness and Economic Growth Act of 1992, was vetoed by the President 

and never became law. 

10 
EGTRRA increased the child tax credit from $500 to $1,000, phased in over 10 years, 

effective for taxable years beginning after December 31, 2000.28

Table 4, below, shows the increase of the child tax credit. 

Table 4.–Increase of the Child Tax Credit 

Calendar Year 

Credit Amount 

Per Child 

 2001-2004 $600 

 2005-2008 $700 

 2009 $800 

 2010 $1,000 

EGTRRA made the child tax credit refundable to the extent of 10 percent of the 

taxpayer’s earned income in excess of $10,000 for calendar years 2001-2004. The percentage 

was increased to 15 percent for calendar years 2005 and thereafter. The $10,000 amount was 

indexed for inflation beginning in 2002. Families with three or more children were allowed a 

refundable credit for the amount by which the taxpayer’s Social Security taxes exceed the 

taxpayer’s earned income credit (the present and prior-law rule), if that amount was greater than 

the refundable credit based on the taxpayer’s earned income in excess of $10,000. EGTRRA 

also provided that the refundable portion of the child tax credit does not constitute income and 

shall not be treated as resources for purposes of determining eligibility or the amount or nature of 

benefits or assistance under any Federal program or any State or local program financed with 

Federal funds. 

EGTRRA provided that the refundable child tax credit no longer be reduced by the 

amount of the alternative minimum tax. In addition, EGTRRA allows the child credit to the 

extent of the full amount of the individual’s regular income tax and alternative minimum tax. 

EGTRRA generally is effective for taxable years beginning after December 31, 2000. 

The provision relating to allowing the child tax credit against alternative minimum tax is 

effective for taxable years beginning after December 31, 2001. 

JGTRRA increased the amount of the child tax credit from $600 to $1,000 for 2003 and 

2004.29 As explained above, the increase for 2003 was paid out in advance. 

 28 The credit reverts to $500, and all of the other EGTRRA child tax credit rules expire, for 

taxable years beginning after December 31, 2010, under the sunset provision of EGTRRA. 

29 WFTRA increased the child tax credit to $1,000 for 2005-2009. 

11 
5. Earned income credit (“EIC”) 

The Tax Reduction Act of 1975 created an EIC, for 1975 only, in the form of a 

refundable tax credit equal to 10 percent of the first $4,000 of earned income, phased out as 

adjusted gross income rose from $4,000 to $8,000. This EIC applied only to families who 

maintained a household for at least one dependent child for whom they were entitled to claim a 

personal exemption. The Act did not include an advance credit mechanism, so taxpayers 

received the benefit of the credit only through reducing the amount of their withholding for the 

remainder of 1975 or upon filing their 1975 tax returns in early 1976.30

The Tax Fairness and Economic Growth Act of 1992 would have repealed the 

supplemental young child credit and increased the basic EIC rate for taxpayers with two or more 

qualifying children as shown in the following table.31

Table 5.–Increase of the Basic EIC 

One qualifying child Two or more qualifying children 

Year 

Credit rate Phase-out 

rate Credit rate Phase-out rate 

1992 17.6 12.57 18.90 13.49 

1993 18.5 13.21 20.50 14.64 

1994 and later 23.0 16.43 26.00 18.56 

The Tax Fairness and Economic Growth Act of 1992 would have permitted taxpayers to 

include all health insurance expenses as medical expenses, subject to the 7.5 percent of adjusted 

gross income floor on deductible medical expenses, regardless of whether these expenses had 

been used to claim the health insurance component of the EIC. Also, the Tax Fairness and 

Economic Growth Act of 1992 would have permitted a self-employed taxpayer to claim the 

allowable deduction for health insurance costs and to use the full amount of these expenses that 

were related to coverage of dependent children to claim the health insurance component of the 

EIC. These provisions would have been effective for taxable years beginning after December 

31, 1991. 

For married taxpayers who file a joint return, EGTRRA increased the beginning and 

ending of the EIC phase-out as follows: by $1,000 in the case of taxable years beginning in 

 30 The Revenue Adjustment Act of 1975 extended the EIC for the first six months of 1976. In 

addition, the credit for 1975 was modified to provide that it be disregarded in determining eligibility for, 

or benefits under, Federal or federally assisted aid programs, as long as the individual was a recipient of 

benefits under the program in the month before receiving a tax refund resulting from the EIC. The Tax 

Reform Act of 1976 broadened the EIC and extended it through 1977. 

31 As noted above, H.R. 4210, the Tax Fairness and Economic Growth Act of 1992 was vetoed 

by the President and never became law. 

12 
2002, 2003, and 2004; by $2,000 in the case of taxable years beginning in 2005, 2006, and 2007; 

and by $3,000 in the case of taxable years beginning after 2007.32 The $3,000 amount is 

adjusted annually for inflation after 2008. 

EGTRRA repealed the prior-law provision that reduces the EIC by the amount of an 

individual’s alternative minimum tax. 

6. Individual credit for FICA taxes 

The Tax Fairness and Economic Growth Act of 1992 would have provided an income tax 

credit for up to 20 percent of an employee’s Social Security tax liability for 1992 and 1993.33 In 

the case of State and local government workers who did not pay FICA taxes, contributions to a 

retirement plan maintained by the State or local government would have been considered 

equivalent to Social Security tax liability. The maximum credit would have been $150 for 

unmarried taxpayers and $300 for married couples filing joint returns. The tax credit would have 

been phased out ratably for taxpayers with adjusted gross income between $50,000 and $70,000 

(married taxpayers filing a joint return), or between $35,000 and $50,000 (unmarried taxpayers 

filing as single or as head of household). The tax credit would have been refundable to taxpayers 

with a “qualifying child,” who generally would have been defined as a child under age 19 who 

resided with the taxpayer for more than six months during the taxable year. 

7. Reduced rates for capital gains and dividends of individuals 

The Economic Recovery Tax Act of 1981 reduced the maximum rate on net capital gain 

from 28 percent to 20 percent. In addition, the tax on capital gains of taxpayers other than those 

subject to the maximum rate was lowered as a result of the individual income tax reductions in 

that Act. The reductions were effective for sales or exchanges after June 9, 1981. 

JGTRRA reduced the rates on net capital gain from 10 and 20 percent to 5 and 15 

percent, effective for sales or exchanges after May 6, 2003. JGTRRA also reduced the 

maximum rate on most dividend income from 35 percent to 15 percent, effective for taxable 

years beginning after December 31, 2002.34

 32 EGTRRA made several other modifications to the EIC. 

33 As noted above, H.R. 4210, the Tax Fairness and Economic Growth Act of 1992 was vetoed 

by the President and never became law. 

34 Under JGTRRA, the reductions in the net capital gain rates and the maximum rate on dividend 

income would have expired for taxable years beginning after December 31, 2008. However, the Tax 

Increase Prevention and Reconciliation Act of 2005, enacted on May 17, 2006, delayed the expiration of 

those provisions to taxable years beginning after December 31, 2010. 

13 
B. Business Income Tax Provisions 

Congress also has responded to past economic slowdowns with a variety of tax changes 

designed to provide fiscal stimulus for businesses. Among these changes have been accelerated 

depreciation (including an accelerated cost recovery system and bonus depreciation), investment 

tax credits, section 179 expensing, expansion of the period for net operating loss carryovers and 

carrybacks, reductions in corporate income tax rates, and other changes, a number of which are 

described below. 

1. Depreciation 

Accelerated Cost Recovery System

Prior to 1981, the Internal Revenue Code’s depreciation system was based on estimated 

useful lives determined either using facts and circumstances or by using guideline lives provided 

in Treasury guidance.35 The useful lives generally were applied to calculate depreciation 

deductions using a straight-line or double declining balance method. 

In 1981, the prior law depreciation system was replaced with the Accelerated Cost 

Recovery System (“ACRS”).36 ACRS was a system for recovering capital costs using 

accelerated methods over predetermined recovery periods that generally are unrelated to, but 

shorter than, prior law useful lives. For personal property, the cost of eligible property was 

recovered over a 15-year, 10-year, five-year, or three-year period, depending on the type of 

property. The method used to calculate the depreciation expense generally was 150 percent 

declining balance (with change to straight-line) for property placed in service in 1981 through 

1984, 175 percent declining balance (with change to sum of the year-digits) for property placed 

in service in 1985, and 200 percent declining balance (with change to sum of the year-digits) for 

property placed in service after 1985. A half-year convention was used that permitted a half-year 

depreciation to be claimed in the first year, with all remaining depreciation claimed in the 

subsequent years. Real property was recovered over 15 years either on an accelerated schedule 

or using a straight-line convention. 

The ACRS system significantly accelerated depreciation on tangible personal property. 

For example, pre-ACRS, machinery used in producing textiles could have been depreciated over 

the mid-point of the 11-year class life using the straight-line method. Post-ACRS cost of the 

same machinery was recovered over a five-year recovery period (the class life was between four 

and 18.5 years) using a 150 percent declining balance method (200 percent declining balance 

after 1985). 

 35 See Rev. Proc. 62-21, 1962-2 C.B. 418, for guideline useful lives. 

36 Economic Recovery Tax Act of 1981, Pub. L. No. 97-34, sec. 201 (1981). 

14 
1992 bonus depreciation

H.R. 4210, the Tax Fairness and Economic Growth Act of 1992,37 would have provided 

an additional first-year depreciation deduction equal to 10 percent of the adjusted basis of certain 

qualified property. Fifty percent of the amount of the additional first-year depreciation deduction 

would have been allowed as a deduction in the year the property was placed in service and the 

remaining 50 percent would have been allowed as a deduction in the succeeding taxable year. 

The deduction also would have been allowable against the alternative minimum tax. Qualifying 

property generally would have included section 1245 property, the original use of which 

commenced with the taxpayer after February 1, 1992, placed in service on or after February 1, 

1992, and before July 1, 1993. Additionally, the property would have had to have been acquired 

by the taxpayer (1) on or after February 1, 1992, and before January 1, 1993, but only if no 

binding written contract for the acquisition was in effect before February 1, 1992, or (2) pursuant 

to a binding written contract which was entered into on or after February 1, 1992, and before 

January 1, 1993.38

The bonus depreciation provision would have significantly accelerated allowable 

deductions. For example, a taxpayer that placed in service a piece of machinery (a seven-year 

asset, and assuming the half-year convention) would have deducted 19.29 percent of the asset’s 

basis (five percent bonus + 14.29 percent regular depreciation) during the first year. Without 

bonus depreciation, the same taxpayer would have deducted 14.29 percent of the asset’s basis 

during the first year. 

2002 bonus depreciation

The Job Creation and Worker Assistance Act of 200239 provided an additional first-year 

depreciation deduction equal to 30 percent of the adjusted basis of qualified property.40 The 

additional first-year depreciation deduction was allowed for both regular tax and alternative 

minimum tax purposes for the taxable year in which the property was placed in service. The 

basis of the property and the depreciation allowances in the placed-in-service year and later years 

were appropriately adjusted to reflect the additional first-year depreciation deduction. In 

addition, there were no adjustments to the allowable amount of depreciation for purposes of 

computing a taxpayer’s alternative minimum taxable income with respect to property to which 

the provision applies. 

 37 This bill was vetoed by the President and never became law. 

38 For self-constructed property, the taxpayer must have begun the manufacture, construction, or 

production of the property on or after February 1, 1992, and before January 1, 1993. 

39 Pub. L. No. 107-147, sec. 101 (2002). 

40 A taxpayer was permitted to elect out of the 30-percent additional first-year depreciation 

deduction for any class of property for any taxable year. 

15 
The bonus depreciation significantly accelerated allowable deductions. For example, a 

taxpayer who placed in service machinery (a seven-year asset, and assuming the half-year 

convention) would have deducted 40 percent (30 percent + (70 percent x 14.29 percent)) of the 

asset’s basis during the first year. Without bonus depreciation, the same taxpayer would have 

deducted 14.29 percent of the asset’s basis during the first year. 

For property to qualify for the additional first-year depreciation deduction, it must have 

met all of the following requirements. First, the property must have been property to which the 

general rules of MACRS apply: (1) with an applicable recovery period of 20 years or less, (2) 

water utility property (as defined in section 168(e)(5)), (3) computer software other than 

computer software covered by section 197, or (4) qualified leasehold improvement property. 

Second, the original use of the property must have commenced with the taxpayer on or after 

September 11, 2001. Third, the taxpayer must have purchased the property within the applicable 

time period. Finally, the property must have been placed in service before January 1, 2005. An 

extension of the placed in service date of one year (i.e., January 1, 2006) was provided for 

certain property with a recovery period of 10 years or longer and certain transportation property. 

The applicable time period for acquired property was: (1) after September 10, 2001, and 

before September 11, 2004, and no binding written contract for the acquisition was in effect 

before September 11, 2001, or (2) pursuant to a binding written contract which was entered into 

after September 10, 2001, and before September 11, 2004.41

2003 bonus depreciation

The Jobs and Growth Tax Relief Reconciliation Act of 200342 provided an additional 

first-year depreciation deduction equal to 50 percent of the adjusted basis of qualified property.43 

Qualified property was defined in the same manner as for purposes of the 30-percent additional 

first-year depreciation deduction, except that the applicable time period for acquisition or self 

construction of the property and placed-in-service date requirement were modified (see below). 

Property for which the 50-percent additional first-year depreciation deduction was claimed was 

not eligible for the 30-percent additional first-year depreciation deduction. 

 In order to qualify, the property must have been acquired after May 5, 2003, and before 

January 1, 2005, and no binding written contract for the acquisition was in effect before May 6, 

2003. With respect to property that was manufactured, constructed, or produced by the taxpayer 

for use by the taxpayer, the taxpayer must have begun the manufacture, construction, or 

production of the property after May 5, 2003. 

 41 For self-constructed property, the taxpayer must have begun the manufacture, construction, or 

production of the property after September 10, 2001, and before September 11, 2004. 

42 Pub. L. No. 108-27, sec. 201 (2003). 

43 A taxpayer was permitted to elect out of the 50-percent additional first-year depreciation 

deduction for any class of property for any taxable year. 

16 
This provision also extended the placed-in-service date requirement for certain property 

with a recovery period of 10 years or longer and certain transportation property to property 

placed in service prior to January 1, 2006 (instead of January 1, 2005). 

2. Investment tax credit 

1962

The Tax Rate Extension Act of 1962 adopted the investment tax credit.44 The investment 

tax credit was seven percent (three percent in the case of certain public utilities) of investments 

in new tangible personal property and certain depreciable real property (except buildings and 

structural components of buildings). No credit was allowed for property with a useful life of less 

than four years. For property with a life of four or five years, one-third of the investment was 

taken into account; for property of six to eight years, two-thirds was taken into account; and in 

the case of property with a longer life the full amount of the investment was taken into account. 

Up to $50,000 of used property was eligible for the credit. The credit could offset tax liability in 

full up to $25,000, but above that point the credit could not reduce tax liability by more than 25 

percent. Any unused credit was allowed to be carried forward for five years and used in those 

years to the extent there was sufficient tax liability under the applicable limitation. If the 

property was sold before the end of its useful life, any excess credit was required to be 

recaptured. 

The investment tax credit significantly accelerated taxpayers’ basis recovery. For 

example, a taxpayer that placed in service a piece of machinery with a 12-year useful life (preACRS recovery period) would have received a credit of seven percent of the asset’s basis plus a 

depreciation deduction of 3.9 percent (.93, that is, (1-.07) (basis reduction for credit received) x 

.0416 (1/12th x .5 (half-year convention)). The credit, assuming the highest corporate tax rate of 

52 percent, would have resulted in tax savings of 3.64 percent (seven percent x 52 percent tax 

rate). Thus, the total tax savings during the first year would have been 5.66 percent (2.02 percent 

depreciation (3.9 percent x 52 percent tax rate), plus 3.64 percent investment tax credit). 

Without the investment tax credit, the same taxpayer would have achieved a tax savings of 2.02 

percent. 

1971

The Revenue Act of 1971 provided for a seven percent investment credit which was 

substantially similar to the investment tax credit previously allowed.45 The three principle 

differences from the credit previously allowed were (1) the useful life brackets used in 

determining the amount of investment in property which was eligible for the credit were 

shortened by one year, (2) the credit generally was not allowed for foreign-produced machinery 

and equipment, and (3) public utility property was eligible for a four percent rather than a three 

percent credit. 

 44 Pub. L. No. 87-508, sec. 2 (1962). 

45 Pub. L. No. 92-178, sec. 49 (1972). 

17 
1975

The Tax Reduction Act of 1975 increased the investment tax credit from seven percent to 

10 percent in an effort to stimulate the economy.46 The Act also increased the limit on qualified 

investment in used property from $50,000 to $100,000. For property with a life of three or four 

years, one-third of the cost of investment was taken into account; for property of five or six 

years, two-thirds or the cost was taken into account; and for property with seven years or more, 

the full amount of the investment was taken into account. The Act also introduced “progress 

payments,” which allowed a current investment tax credit on projects that would take at least two 

years to complete and had a life of seven years or more (the progress payments were phased in 

ratably over five years). Any unused credit could be carried back three years and carried forward 

seven years. 

1976

The Tax Reform Act of 1976 extended the 10-percent credit and continued the $100,000 

limitation on qualified investment in used property, from 1977 through 1980.47 

1981

The Economic Recovery Tax Act of 1981 expanded the eligible property to include 

petroleum storage facilities and certain railroad rolling stock.48 The used property limitation was 

increased from $100,000 to $125,000 for years 1981 through 1984, and to $150,000 in years 

after 1984. A recapture provision also was added whereby the regular credit was recomputed 

upon early disposition by allowing a two-percent credit for each year the property was held (no 

recapture after five years; three years for eligible three-year property). Additionally, the unused 

investment credit carry forward period was increased from seven to 15 years, and a new at-risk 

limitation was imposed, which applied to the same category of taxpayers subject to the section 

465 (passive activity) rules. 

3. Section 179 expensing 

In lieu of depreciation, a taxpayer with a sufficiently small amount of annual investment 

may elect to deduct (or “expense”) such costs under section 179. In 1992, the maximum amount 

a taxpayer could expense was $10,000. In 1992, H.R. 4210, the Tax Fairness and Economic 

Growth Act of 1992, would have increased this amount to $20,000 for taxable years beginning in 

1992 and 1993.49 In 2003, the then-prevailing $25,000 limitation was increased to $100,000, 

 46 Pub. L. No. 94-12, secs. 301-2, 304 (1975). 

47 Pub. L. No. 94-555, secs. 801-2 (1976). 

48 Pub. L. No. 97-34, secs. 211 and 213 (1981). 

49 This bill was vetoed by the President and never became law. 

18 
and the phase-out level of $200,000 was increased to $400,000 for tax years beginning in 2002 

through 2006.50

For reference purposes, the maximum amount that a taxpayer can expense, for taxable 

years beginning in 2007 through 2010, is $125,000 of the cost of qualifying property placed in 

service for the taxable year. The $125,000 amount is phase out by the amount by which the cost 

of qualifying property placed in service during the taxable year exceeds $500,000. The $125,000 

and $500,000 amounts are indexed for inflation in the taxable years beginning after 2007 and 

before 2011. In 2011, these amounts revert back to $25,000 and $200,000. 

4. Net operating losses 

Prior to 1981, net operating losses (“NOLs”) generally were allowed a three-year 

carryback and a seven-year carryover. In 1981, the NOL carryover period was extended to 15 

years for NOLs in taxable years ending after December 31, 1975.51

In 2002, the NOL carryback period was temporarily increased to five years for NOLs 

arising in taxable years ending in 2001 and 2002.52 In addition, NOL carrybacks arising in 

taxable years ending in 2001 and 2002, as well as NOL carryovers to those taxable years, were 

allowed to offset 100 percent of a taxpayer’s alternative minimum taxable income.53

5. Reduction in corporate income tax rates 

As part of the Revenue Act of 1964, the corporate income tax rate was reduced from 52 

percent to 50 percent for taxable years beginning in 1964 and 48 percent for taxable years 

beginning in 1965 and subsequent years.54 These rates were a combination of a normal tax rate 

which applied to all corporate income, and a surtax rate, which applied to corporate income in 

excess of $25,000.55

 50 Jobs and Growth Tax Relief Reconciliation Act of 2003 (Pub. L. No. 108-27, sec. 202 (2003)). 

51 Economic Recovery Tax Act of 1981 (Pub. L. No. 97-34, sec. 207 (1981)). NOLs of financial 

institutions were not modified; a carryback of 10 years and carryforward of five years was retained. 

52 Job Creation and Worker Assistance Act of 2002 (Pub. L. No. 107-147, sec. 102 (2002)). 

53 Absent this special rule, NOL carryovers are only permitted to offset 90 percent of a 

taxpayer’s alternative minimum taxable income. Sec. 56(d)(1)(A). 

54 Pub. L. No. 88-272, sec. 121 (1964). 

55 The normal tax rates for pre-1964, 1964, and 1965 and subsequent years was 30 percent, 22 

percent, and 22 percent, respectively. The surtax rates were 22 percent, 28 percent, and 26 percent, 

respectively. 

19 
In 1981, the tax rates for the two lowest corporate brackets were reduced.56 The tax rates 

for the two brackets of $0 to $25,000 and $25,000 to $50,000 were reduced from 17 percent and 

20 percent, respectively, to 16 percent and 19 percent, respectively, for taxable years beginning 

in 1982, and to 15 percent and 18 percent, respectively, for taxable years beginning in 1983 and 

later years.

 56 Economic Recovery Tax Act of 1981 (Pub. L. No. 97-34, sec. 231 (1981)). 

20 
C. Purchase of New Principal Residence 

The Tax Reduction Act of 1975 provided individuals buying a newly built or 

substantially rehabilitated principal residence after March 12, 1975, and before January 1, 1977, 

a nonrefundable income tax credit equal to five percent of the purchase price. The credit was 

capped at $2,000. The seller was required to certify that the purchase price was the lowest price 

at which the residence was offered for sale after February 28, 1975. 

21 
III. ECONOMIC EVIDENCE OF EFFICACY OF FISCAL 

STIMULUS THROUGH TAX POLICY 

A. Economic Evidence on the Efficacy of Stimulative Fiscal Policy 

Overview

Stimulative fiscal policy is the term for changes to taxes or spending that are intended to 

stimulate the nation’s total demand for goods and services. These policies usually are enacted 

when the nation’s total demand for goods and services experiences a slowdown in growth, or an 

absolute decline. In such circumstances, there typically would be economic slack, both in the 

sense that employment is below full employment, and in the sense that productive capacity is 

underutilized. Stimulative fiscal policies are intended to increase demand by individuals, 

businesses, or government. The intention is that increased demand will result in increased 

production and a movement in the direction of full employment and production. To be effective, 

the fiscal stimulus needs to be enacted in time to address the period of employment decline and 

underutilization of capacity. If the fiscal stimulus is delayed until the economy has recovered, 

then adoption of incentives may lead to overstimulation; the potential increase in inflation that 

might in turn follow could prompt a restrictive Federal Reserve monetary policy response. 

This section presents economic evidence on whether stimulative policies are effective in 

achieving their intended outcome. Our analysis focuses on changes in taxes, that would 

potentially increase demand by either individuals or businesses. 57 Whether these policies are 

effective requires answering two questions. First, is the stimulative fiscal policy effective in 

increasing activity by the targeted group? Second, does increased activity by the targeted group 

result in increased production and a movement in the direction of full employment and 

production? We consider these two questions first in the context of policies aimed at individuals, 

and then at those aimed at businesses. 

 57 See Congressional Budget Office, Options for Responding to Short-Term Economic Weakness, 

January 2008; and Douglas W. Elmendorf and Jason Furman, “If, When, How: A Primer on Fiscal 

Stimulus,” Strategy Paper, the Hamilton Project, January 2008, for additional summaries of the evidence 

on both tax and spending stimulus policies. Both of these papers emphasize the importance of avoiding 

large increases in the Federal debt in an effort to provide temporary stimulus. The concern is that 

increased Federal borrowing would result in substantial drag on the economy by competing for funds in 

the financial markets, and thus crowding out possibly more productive private borrowing. For this 

reason, these papers focus on which stimulus policies are likely to have the most “bang for the buck” in 

terms of the ratio of stimulus effect to cost to the Federal budget. 

22 
B. Evidence Related to Individual Income Provisions 

There are essentially two types of stimulative fiscal policy provisions intended to affect 

individuals. One type of policy takes the form of tax reductions that generally are intended to 

leave affected individuals with higher after-tax income, overall. An example of such a policy 

would be increased child tax credits. This type of tax policy is called a lump-sum tax change. 

The other type of policy takes the form of tax rate reductions that generally are intended to 

increase the after-tax income resulting from economic activity, thereby encouraging that activity. 

An example of such a policy would be reductions in individual income tax rates. This type of 

policy is called a marginal rate change. 

Each of the policies mentioned in the section on tax policy related to individuals can have 

both lump-sum and marginal effects. The policies that have mainly lump-sum effects include 

cash rebates, increases in the standard deduction, increases in dependent exemptions and child 

tax credits, and individual credits for FICA taxes paid. Policies that also have substantial 

marginal effects include reductions in individual tax rates, changes to the earned income credit 

rates, and reduced rates of tax or capital gains and dividends of individuals. 

Evidence on individual behavioral response to stimulus options 

Individual response to rebates

The best evidence for the individual response to policies that are predominantly lumpsum in character comes from analyzing the effects of the tax rebates in 1975, 2001, and 2003. 

Several papers have explored the economic effects of these rebates, with the more recent papers 

generally finding that a significant portion of the rebates was spent on increased consumption in 

subsequent quarters. 

These rebates were largely a lump-sum change, in the sense that they were based on past 

economic activity, and (with some administrative delay) took immediate effect. However, they 

also were put in place at the same time as marginal rate changes that were expected to be law for 

a number of years. As a result, a portion of the observed response to rebates may have been a 

response to an expected long-run decrease in tax liability. Hence, the evidence on the 

stimulative effects of the tax rebates probably provides an upper bound estimate of the expected 

stimulus that would be provided by a temporary change of a largely lump-sum nature. 

1975 rebates

A number of studies have reviewed the impact of the temporary 1975 tax rebate, with 

somewhat conflicting conclusions. The 1975 rebate provided a 10-percent rebate of 1974 taxes 

up to a maximum of $200 per taxpayer. One study58 found that consumption increased 16 

percent of the rebate amount in the quarter received and had larger effects in later quarters, while 

 58 Alan Blinder, “Temporary Income Taxes and Consumer Spending,” Journal of Political 

Economy, February 1981, 89, pages 26-53. 

23 
an earlier study59 found much smaller effects. A subsequent study60 using monthly consumption 

data found that consumption of nondurables increased by about 20 percent of the rebate amount 

in the month the rebate was received. 

2001 rebates:

An early study of the 2001 rebates61 analyzed results from the University of Michigan 

Survey of Consumers (MSC) to find out how the rebates influenced taxpayers. At the time of the 

2001 rebates, the MSC added a question that asked “will the tax rebate lead you mostly to 

increase spending, mostly to increase saving, or mostly to pay off debt?” The study found that 

only 22 percent of respondents said they would spend most of their rebates that they estimated 

that about a third of the rebate was consumed in the short-run. They also found no evidence that 

low income individuals were more likely to spend their rebate. 

A later study62 using Consumer Expenditure Survey data found that recipients of the 

2001 rebates spent between 20 to 40 percent of their rebates on non-durable goods during the 

three months after they received their rebates and about another third of their rebates during the 

subsequent three months. 

Another study63 used credit card data to show that consumers initially save some of their 

rebate, by reducing their credit card debt more rapidly. But soon afterwards their spending 

increased. The study found that consumption on an individual’s most actively used credit card 

rose by over $200, about 40 percent of the average household rebate, in the nine months 

following the rebate. 

 59 Franco Modigiliani and Charles Steindel, “Is a Tax Rate an Effective Tool for Stabilization 

Policy?,” Brookings Papers on Economic Activity, 1:1977, pages 175-209. 

60 James Poterba, “Are Consumers Forward Looking? Evidence from Fiscal Experiments,” 

American Economic Review, May 1988, Volume 78, no. 2, pages 413-418. 

61 See Matthew Shapiro and Joel Slemrod, “Consumer Response to Tax Rebates,” American 

Economic Review, 2003, volume 93, no. 1, pp. 274-83; and Matthew Shapiro and Joel Slemrod, “Did the 

2001 Tax Rebate Stimulate Spending?,” National Bureau of Economic Research, working paper No. 

9308, October 2002. 

62 David S. Johnson, Jonathan A. Parker, and Nicholas S. Souleles, “Household Expenditure and 

the Income Tax Rebates of 2001” American Economic Review 96(5):, December 2006, volume 96, no. 5, 

pages 1589-1610. December 2006. 

63 Sumit Agarwal, Chunlin Liu, and Nicholas Souleles, “The Reaction of Consumer Spending 

and Debt to Tax Rebates--Evidence from Consumer Credit Data,” National Bureau of Economic 

Research, working paper No. 13694, December 2007. 

24 
2003 rebates

A study64 of the 2003 rebate also used the MSC to find out whether taxpayers planned to 

spend or to save their tax cuts. The 2003 MSC added a question similar to the one on the 2001 

MSC. The study estimated that rebate recipients spent an additional $9.7 billion in the second 

half of 2003 owing to the combination of rebates and lower tax withholding. This is a bit less 

than a third of the $35 billion amount of rebates and lower tax withholding in the same period. 

In the first half of 2004, spending was boosted by $15 billion, or a bit more than a third of the 

$42 billion cost of the rebates and lower withholding over that period. 

Individual response to marginal tax rate changes

The response to individual marginal tax rate changes can occur in a number of ways, 

depending in part on whether the changes are permanent or temporary. Marginal rate changes do 

create a partial lump-sum effect because liability is reduced, even if there is no change in the 

taxpayer’s economic activity. The additional marginal incentives for economic activity result 

from higher after-tax wages, thereby providing incentives to increase labor supply. If the 

marginal rate change is expected to last for a considerable period, then expected higher after-tax 

returns to saving also provide incentives to save more; and higher after-tax returns to investments 

that are taxed on individual returns (e.g., from sole proprietorships or partnership or S 

corporation income) provide incentives to invest more. Though studies evaluating the effects of 

marginal rate changes tend not to focus on demand aspects of their lump-sum effects, 

qualitatively, the lump-sum effects of marginal rate changes would still bear similarity to the 

results in the rebate section. However, marginal rate changes applied to all taxpayers will 

provide greater changes in the after-tax income of higher income individuals than lower income 

individuals because higher income individuals generally are taxed at higher statutory tax rates. 

Some studies65 have found that lower income individuals are likely to spend a higher portion of 

their increase in after-tax income than individuals with higher incomes or more wealth. Thus, 

some have suggested that from a stimulus standpoint, lump-sum tax changes targeted to lower 

income individuals are likely to be more effective short-run stimulus policies than marginal rate 

changes.66

 64 Julia Lynn Coronado, Joseph P. Lupton, and Louise M. Sheiner, “The Household Spending 

Response to the 2003 Tax Cut: Evidence from Survey Data,” Federal Reserve Board, Finance and 

Economics Discussion Series 2005-32, July 2005. 

65 Johnson, Parker, and Souleles, supra. 

66 See Congressional Budget Office, Options for Responding to Short-Term Economic Weakness, 

January 2008; and Elmendorf and Furman, supra. 

25 
While there is considerable literature on both the savings response67 and the labor supply 

response68 to marginal rate changes, such responses seem unlikely to generate significant shortterm stimulative effect, for reasons discussed below. (They may well, however, have longerterm growth effects.) There is also literature on the responsiveness of taxable income to 

marginal rate changes, but a significant portion of this response reflects timing of payments or 

shifting between economic forms of income that generally do not result in macroeconomic 

changes. To the extent that taxable income reflects underlying economic activity, such as 

changes in labor supply, capital formation, or savings response, it is addressed in the relevant 

literature. The effects on business investment incentives are discussed in the section below. 

Evidence on macroeconomic response to stimulus options

Rigorous empirical evidence for the macroeconomic effect of individual stimulus 

incentives is quite hard to obtain. The core problem is that analysts only see macroeconomic 

data that have been affected by the response, and they do not know how the economy would 

have progressed in the absence of the stimulus. An econometric study would provide evidence 

of the effects of stimulative tax policy only when there are periods of economic slackness that 

are both comparable to the period of interest and that were not accompanied by fiscal stimulus. 

But there have been many significant changes to economic activity that make recession periods 

non-comparable—for instance, financial markets in 2008 are very different than those in 1968. 

Furthermore, the legislative history shows that nearly every recession is accompanied by fiscal 

stimulus legislation. Comparing economic variables in the period before and after a stimulus 

proposal does not show that it is effective, unless one can show that the economy would not have 

responded as it did, in the absence of the stimulus. 

Macroeconomic response to rebates

The studies on the individual response to tax rebates mentioned above show that 

individuals who received the rebates saved a portion but also spent a notable proportion of their 

rebates. The portion that taxpayers saved seems unlikely to result in stimulus. Intuitively, the 

increased saving is likely to at least partially offset the additional government borrowing 

required to finance the rebates. The portion that taxpayers consumed does not necessarily result 

 67 See Charles L. Ballard, “Taxation and Saving,” in John G. Head and Richard Krever (eds.), 

Taxation Toward 2000, Melbourne: Australian Tax Research Foundation, 1997, pp. 267 - 292; and Jane 

G. Gravelle, The Economic Effects of Taxing Capital Income, (Cambridge, MA: MIT Press), 1994, for 

summary descriptions of this research. 

68 See John Pencavel, (1986), “Labor Supply of Men: A Survey,” in Orley Ashenfelter and 

Richard Layard, eds., Handbook of Labor Economics, vol. I, Amsterdam: North-Holland, 1986, pp. 3-

102; James J. Heckman, (1993), “What Has Been Learned About Labor Supply in the Past Twenty 

Years?,” American Economic Review, Papers and Proceedings, May 1993, vol. 83 no. 2, 116-121; Nada 

Eissa, and Jeffrey B. Liebman (1996), “Labor Supply Response to the Earned Income Tax Credit,” 

Quarterly Journal of Economics, May 1996, 111(2):605-637; and Nada Eissa, and Hilary W. Hoynes 

(2003), “Taxes and the Labor Market Participation of Married Couples: The Earned Income Tax Credit,” 

forthcoming, Journal of Public Economics. 204, vol. 88, 1931-1958. 

26 
in an increase in aggregate consumption, nor does it necessarily mean that aggregate 

employment or output are increased. Some have argued that increased interest rates owing to the 

government borrowing necessary to finance the lump-sum rebates might offset the intended 

stimulative effects. Taxpayers who do not receive the rebates could reduce their spending. 

Alternatively, higher interest rates might diminish investment incentives, with the result that, 

while individual consumption might increase for rebate recipients, this increase in demand for 

consumption could be offset by reduced demand for investment goods. Economic simulation 

models provide evidence of whether rebates spur overall economic activity. 

Some analysts have used macroeconomic models—models used to forecast aggregate 

economic activity—to look for evidence on whether rebates spur overall economic activity. 

These models generally find that lump-sum tax changes do spur overall economic activity in the 

shortrun. A 2005 study by us (hereafter, JCT Staff Study)69 addresses the effect of a permanent 

increase in the personal exemption. The increased personal exemption decreased liability in 

2005 by $34 billion (about 0.3 percent of GDP). As a result, in 2005, real GDP was estimated to 

increase by 0.1 percent, real consumption by 0.2 percent, and employment by 0.1 percent; the 

real capital stock was roughly unchanged. 

In a 2002 study, which used a macroeconomic model, the analysts examined the effects 

of a $100 billion rebate (about one percent of GDP), with no accompanying change in marginal 

tax rates. In their base case scenario, they found effects only for the quarter in which the rebate 

was issued, and not for subsequent quarters. 70 The analysts found that for the quarter of issue, 

there was a 0.3 percent increase in real GDP at an annual rate (implying that for the year as a 

whole, GDP was 0.08 percent higher, or $7.5 billion higher than it otherwise would have been); a 

one-half percent increase in real consumption at an annual rate (so an eighth of a percent increase 

for the year as a whole), and essentially no change in employment or the real capital stock. 

Demonstrating the sensitivity of the results to the spending response of consumers, the analysts 

also ran simulations assuming that a larger share of consumers spent the rebate, motivated by the 

results of the analysis of MSC survey data discussed above. In this scenario, consumption and 

GDP are considerably more responsive in the quarter of issue, but there is a negative effect in the 

subsequent quarter that diminishes the overall effect for the year as a whole. The study did not 

report quantitative figures, but the graphs appear to imply an overall total of approximately onehalf to two-thirds of one percent of stimulus to both real GDP and consumption from the rebate. 

Both employment and capital investment rise somewhat in the short run. 

Macroeconomic response to marginal rate changes

As a practical matter, macroeconomic models show most of the short-run stimulative 

effect of marginal rate changes as coming from the lump-sum tax liability decrease associated 

 69 Joint Committee on Taxation, Macroeconomic Analysis of Various Proposals to Provide $500 

Billion in Tax Relief, (JCX-4-05), March 1, 2005. 

70 Douglas W. Elmendorf and David L. Reifschneider, “Short-Run Effects of Fiscal Policy with 

Forward-Looking Financial Markets,” National Tax Journal, Vol. 55, No. 3, September 2002, pp. 357-

386. 

27 
with those changes. The marginal incentives to increase savings, while potentially leading to 

additional investment and growth in the long run, seem unlikely to have a stimulative effect in 

the short run unless there is a shortage of loanable funds, which does not seem to be the case in 

the present period. Further, the incentive to increase saving may be offset by anticipated higher 

interest rates resulting from the need to finance the marginal rate cuts (unless offset by spending 

cuts or other tax increases). The marginal incentive to increase labor supply, while also 

potentially leading to increased growth in the long run, as the capital stock adjusts upward to the 

increased labor supply, also seems unlikely to have a stimulative effect in the short run, 

assuming that the economy is beginning to experience rising unemployment. 

One source of evidence on short-run effects of individual rate changes is provided by the 

JCT Staff Study. The lower rates decreased liability in 2005 by $25 billion (about 0.2 percent of 

GDP). As a result, in 2005, real GDP is pushed up by 0.1 percent, real consumption by 0.3 

percent and employment by 0.1 percent, and the real capital stock is roughly unchanged. These 

results are similar to those for the personal exemption increase of the same amount. The effects 

of these two proposals on GDP start to diverge in the first year after implementation, indicating 

the difference in long-run growth incentives between the two types of proposals. 

A study by the CBO in 200571 examines the effect of a 10 percent, across the board, 

individual marginal rate cut (e.g., in this study, a taxpayer who faces a 28 percent marginal rate 

would have his marginal rate cut to 25.2 percent). The CBO does not report very short-term 

effects, but rather shows the effects for the first five years and the second five years. The JCT 

conventional estimate of the cost of the tax cut over the first five years amounts to about 0.75 

percent of GNP. Over the same period, the CBO analysis suggests that the tax cut results in real 

GDP that is between 0.5 and 0.8 percent higher (depending upon which model is used). The 

CBO does not report consumption or employment or capital investment. 

A 2002 study72 examined sustained marginal rate cuts totaling one percent of GDP on a 

static basis; this magnitude of tax reduction translates into slightly more than a 10-percent across 

the board rate cut. The study does not provide quantitative results, but rather graphic results. In 

the study’s base case scenario, it appears that the study finds that real GDP rises by a bit less than 

half a percent over the first year after the rate cut, while real consumption rises about two-thirds 

of a percent during the same period. Unemployment declines by about an eighth of a percent 

while the capital stock falls somewhat. In a scenario in which taxpayers consume more of their 

decrease in tax liability, the responsiveness of real GDP and real consumption appears to be 

between a third and a half more than their base case scenario. 

The longer-run analysis in both the JCT Staff Study and the 2005 CBO study explores the 

impact that sustained tax cuts can have on the economy, depending on whether and how long-run 

fiscal balance is achieved. The lesson from these discussions is that growing Federal 

 71 Congressional Budget Office, Analyzing the Economic and Budgetary Effects of a 10 Percent 

Cut in Income Tax Rates, Washington, DC, 2002. 

72 Elmendorf and Reifschneider, supra. 

28 
Government deficits would retard economic growth rather than stimulate it, if left unchecked. 

For this reason, recent articles on fiscal stimulus73 have emphasized the desirability of temporary 

over permanent measures. Rebates generally are thought to be more conducive to temporary 

implementation than rate changes. 

 73 See, for example, Ben S. Bernanke, Chairman of the Board of Governors of the Federal 

Reserve System, “Statement before the Committee on the Budget, U.S. House of Representatives,” 

January 17,2008; Congressional Budget Office, Options for Responding to Short-Term Economic 

Weakness, January 2008; and Elmendorf and Furman, supra. 

29 
C. Evidence Related to Business Income Provisions 

Business income tax provisions may be designed to increase the income of businesses or 

alter the return to investment activity, or policies may incorporate both effects. Extension of the 

period for net operating loss carry back is principally of the former category; though it could in 

some circumstances affect the timing of investment. Corporate rate reductions increase the return 

to new investments going forward, but they also increase after-tax corporate income immediately 

by improving the after-tax return on investments previously made. While empirical evidence on 

the short-run impact of these changes is limited, this section provides a review of economic 

analyses of the effects of these and other provisions on the economy. 

1. Bonus depreciation and expensing 

Bonus depreciation is partial expensing for investment in certain plant and equipment. 

For bonus depreciation to have a stimulative impact on short-run aggregate demand, or a longrun impact on macroeconomic growth, it is necessary that the depreciation change influence the 

behavior of individual firms. One study reports take-up rates for bonus depreciation for tax years 

2002 through 2004 ranged from 54 to 61 percent for C corporations and 65 to 70 percent for S 

corporations.74 The author notes that loss firms, firms with loss or credit carry forwards, and 

firms that generated new credits may not have benefited sufficiently from the bonus depreciation 

to avail themselves of it. This would make bonus depreciation a less attractive option if firms are 

likely to have large stocks of accumulated losses. Also, most states did not conform to the 

Federal provisions, likely reducing take-up rates. Firms that do not find the benefits of 

accelerated depreciation large enough to induce them to claim them are unlikely to increase their 

investment in response to them.75 Claiming bonus depreciation does not mean that new 

investment in fact took place, as bonus depreciation is available to investments that would have 

been made even in the absence of the availability of bonus depreciation. Thus, while over half of 

all C and S corporations claimed bonus depreciation, various surveys indicate bonus depreciation 

may have been an important factor in determining the level or timing of investment for only 10 

percent of businesses. 76 

Indeed, several studies find modest effects from the bonus depreciation of 2002 through 

2004. While aggregate real expenditures on certain types of investment appear to correspond to 

the predicted impact of bonus depreciation, further examination of the data suggests more 

 74 Matthew Knittel, “Corporate Response to Accelerated Depreciation: Bonus Depreciation for 

Tax Years 2002-2004,” Office of Tax Analysis Working Paper 98, Department of the Treasury, May 

2007. 

75 Matthew Knittel, “Small Business Utilization of Accelerated Tax Deprection: Section 179 

Expensing and Bonus Depreciation,” Proceedings of the National Tax Association, Ninety-Eighth Annual 

Conference, National Tax Association, Fall 2005. 

76 Darrel S. Cohen and Jason Cummins, “A Retrospective Evaluation of the Effects of 

Temporary Partial Expensing,” Federal Reserve Board, Finance and Economics Discussion Series, 

Working Paper No. 2006-19, April 2006. 

30 
ambiguity. Long-lived assets which should have benefited more from the provisions than shortlived assets did not exhibit any greater investment.77 

Another study notes that while aggregate effects may have been modest, bonus 

depreciation may have had a more substantial impact on the composition of investment, favoring 

those assets which qualified for the provisions.78 Estimates suggest investment in certain longlived assets (such as farming and rail structures) increased by as much as 28 percent, while 

investment in nonqualifying assets (e.g., residential structures) actually contracted. Overall, 

GDP expands between 0.07 percent and 0.14 percent while employment rises by roughly 

100,000 to 200,000. The expiration of the provisions contributes to the effect as firms accelerate 

their investments to qualify. Acceleration of planned investment can be helpful in boosting the 

economy during a downturn; this effect is clearly temporary, as investment would decline 

modestly after the bonus depreciation allowance expires. However, others note that the usual 

conclusion that a temporary investment incentive will have a greater short-term effect on 

investment than a permanent tax change does not necessarily hold once general equilibrium 

considerations are taken into account.79

2. Investment tax credit 

In contrast to bonus depreciation, an investment tax credit (“ITC”) provides a net 

decrease in total tax liability, in addition to a deceleration of tax liability. Evidence about the 

impact of the ITC on economic stimulus and stabilization is mixed. Some early work found little 

evidence that the ITC was an effective fiscal policy tool.80 Not only was it expensive—each 

dollar of net revenue loss raises output between $0.51 and $0.85 – but also it may have had 

destabilizing effects exacerbated by anticipations of policy changes with respect to the tax 

treatment of investment. Crowding out of non-favored investment may have been sufficient to 

offset a large percentage of the increase in the capital stock. Indeed, some have suggested that 

gains from reduced distortion across assets due to repeal of the ITC in 1986 were significant 

when measured against the losses from a higher cost of capital resulting from repeal.81 In 

addition, one author finds that capital suppliers may capture much of the benefits of the ITC 

 77 Ibid. 

78 Christopher House and Matthew D. Shapiro, “Temporary Investment Tax Incentives: Theory 

with Evidence from Bonus Depreciation,” National Bureau of Economic Research, working paper no. 

12514. September, 2006. 

79 Rochelle M. Edge and Jeremy B. Rudd, “Temporary Partial Expensing in a General 

Equilibrium Model,” Federal Reserve Board, Finance and Economics Discussion Series, Working Paper 

No. 2005-19, April 2005. 

80 Alan J. Auerbach and Lawrence H. Summers, “The Investment Tax Credit: An Evaluation,” 

National Bureau of Economic Research Working Paper No. 404, November 1979. 

81 Alan J. Auerbach, “The Deadweight Loss from Capital Income Taxation,” Journal of Public 

Economics, vol. 40, 1989. pp. 1-36. 

31 
through higher prices rather than the benefits flowing to investing firms.82 However, others have 

found the ITC to have large effects for favored equipment and a smaller impact on gross 

investment. As much as 10 percent of investment in favored sectors may be attributable to the 

ITC.83 

Macroeconomic model estimates have suggested the design of an effective ITC. One 

study suggests that a 10-percent permanent ITC lowers the user cost of capital 10 percent and 

would raise the capital stock by six percent. The authors estimate the largest “bang for the buck” 

would result from an ITC on producers’ durable equipment above a moving base (growing with 

nominal GDP).84 Others estimate that a 10-percent permanent ITC would lower the user cost of 

capital by as much as 14 percent. This would provide a substantial economic stimulus buy with 

a lag of several quarters.85 Another author estimates that a 1.5-percent temporary investment 

subsidy raises output growth by 0.8 percentage points (compared with 0.65 percentage points 

when the subsidy is permanent) in the quarter in which the credit is implemented. Growth falls 

by one percentage point in the quarter when the credit expires. A permanent subsidy leads to 

more capital deepening in the long term, with a greater cost in terms of foregone revenue.86

However, there may be timing effects from a temporary ITC.87

3. Corporate tax rate reductions 

The JCT Staff Study referenced earlier also estimated the macroeconomic impact of 

corporate rate reductions.88 A decrease in the corporate income tax rate primarily affects the 

economy through increasing the after-tax rate of return on corporate capital, which provides 

 82 Austan Goolsbee, “Investment Tax Incentives, Prices, and the Supply of Capital Goods,” 

Quarterly Journal of Economics, Vol 113, No. 1, February 1998, pp. 121-148. 

83 Robert E. Hall and Dale W. Jorgenson, “Tax Policy and Investment Behavior,” American 

Economic Review, Vol 57 No. 3, June 1967, pp. 391-414. Reprinted in Dale W. Jorgenson, Investment: 

Tax Policy and the Cost of Capital, MIT Press, 1996. 

84 Laurence H. Meyer, Joel L. Prakken, and Chris P. Varvares, “Designing an Effective 

Investment Tax Credit,” Journal of Economic Perspectives, vol. 7, No. 2, Spring 1993. pp. 189-1996. 

85 Elmendorf and Reifschneider. supra. Because they do not report the cost of this ITC as a share 

of GDP, it is difficult to interpret their results. Small short-run effects may owe to a small tax cut or to 

minimal responsiveness. 

86 Paul Gomme, “Evaluating the Macroeconomic Effects of a Temporary Investment Tax Credit, 

Federal Reserve Board of Cleveland Policy Discussion Paper No. 3, January 2002. Available at SSRN: 

http://ssrn.com/abstract=1025459. 

87 Andrew Abel, “Dynamic Effects of Permanent and Temporary Tax Policies in a Model of 

Investment,” Journal of Monetary Economics, vol 9, 1982, pp. 353-375. 

88 Joint Committee on Taxation, Macroeconomic Analysis of Various Proposals to Provide $500 

Billion in Tax Relief, (JCX-4-05), March 1, 2005. 

32 
incentives for investment in corporate capital. Over time, this increased investment results in 

more goods and services increasing total output. It also raises labor productivity, leading to 

higher after-tax income for workers, which may stimulate additional growth due to increased 

consumer demand. Real GDP is predicted to be 0.3 percent higher the first year following a 

permanent corporate rate cut. Employment rises nearly 0.4 percent. Consumption is nearly flat 

in the first year, but rises thereafter. A temporary change such as might be instituted for shortrun stimulus purposes could have perverse effects on investment, as it would lower the value of 

initial depreciation deductions, while preserving the higher tax rate on future profits. Thus, the 

corporate tax rate reduction generally has the greatest effect on long-term growth.

33 
IV. DESIGN ISSUES IN IMPLEMENTING A CASH REBATE 

TO INDIVIDUALS 

A. Recent Cash Rebates 

As described above, on three occasions the Congress has adopted a policy of fiscal 

stimulus in part by provding cash to individuals based on each individual’s tax return 

information. These cash payments often are described as tax “rebates.” Two such stimulus 

programs have been used during the last decade. Each is briefly summarized immediately 

below. The remainder of this section then turns to the question of how best to design a rebate 

program in light of three sometimes-conflicting constraints: (1) the targeting of particular 

individuals as the recipients of the tax rebates, (2) the desire to distribute the rebates as quickly 

as possible, and (3) the administrative and systems limitations of the agencies that are charged 

with distributing the rebates. 

Rate reduction credit in EGTRRA 2001

EGTRRA became law in June 2001, shortly after the 2000 tax return season (the period 

during which the IRS processes most individual income tax returns) had concluded. EGTRRA 

included a “rate reduction credit” for 2001 (i.e., the then-current year), paid in advance beginning 

in June of that year, to deliver economic stimulus to the economy. The rate reduction credit was 

designed to give taxpayers the benefit of EGTRRA’s reduction of the lowest income tax bracket, 

from 15 percent to 10 percent, on the first $6,000 of taxable income (in the case of a single 

taxpayer), retroactive to January 1, 2001, and to pay that amount immediately (rather than in 

reduced tax liability reflected on 2001 tax returns filed in 2002). The credit was set at $300 for a 

single taxpayer, because that amount equaled the difference between a 15 percent tax and a 10 

percent tax on $6,000 of income. 

Most taxpayers received this credit in the form of a check issued by the Department of 

the Treasury. The amount of the check effectively was computed as the lesser of (1) the 

maximum amount of benefit a taxpayer could obtain in 2001 from the reduction of the lowest tax 

bracket (i.e., $300 for a single taxpayer) or (2) the taxpayer’s actual tax liability on the 

taxpayer’s 2000 tax return (i.e., the prior year’s return). When taxpayers filed their 2001 tax 

returns in 2002, they were required to complete a worksheet to calculate the actual credit to 

which they were entitled in 2001, based on their actual tax return information. (Such an 

arrangement is referred to as a “true-up” mechanism.) If a taxpayer’s actual credit exceeded the 

check the taxpayer had received in 2001 (for example, because the taxpayer had no tax liability 

in 2000 but did in 2001), the taxpayer claimed a credit against 2001 tax liability. If the check 

was greater than the credit, the taxpayer was not required to repay that amount. As a result, the 

rate reduction credit mechanism effectively gave taxpayers the better of a rate reduction in 

respect of 2001 income or in respect of 2000 income. 

Child tax credit in JGTRRA 2003

JGTRRA became law in May 2003. It included an increase of the child tax credit from 

$600 to $1,000. This $400 per child increase in the credit for 2003 was paid in advance 

beginning in July 2003, on the basis of information on the 2002 tax return. As in 2001, a true-up 

34 
system had taxpayers complete a worksheet to calculate the actual child tax credit based on their 

2003 tax return. If the actual credit to which a taxpayer was entitled for 2003 exceeded the cash 

payment that the taxpayer received in 2003 (e.g., if a child was born in 2003), the taxpayer could 

claim the additional credit against 2003 tax liability when the 2003 tax return was filed in 2004. 

If the 2003 cash payment was greater than the credit (e.g., if a child became 17 in 2003), the 

taxpayer was not required to repay that amount. Again, therefore, taxpayers effectively obtained 

the better of an increased child credit for 2002 or for 2003. 

35 
B. Design Issues 

1. Overview 

There are two main policy design issues to consider when formulating a tax-based cash 

stimulus: (1) the policy goal of who should receive the stimulus rebates (targeting); and (2) the 

policy goal of getting cash out quickly (timeliness). Both of these goals, however, are 

constrained in practice by administrative and system limitations at the agencies that are charged 

with distributing the cash payments. 

The Federal government has two large tax-based databases that, at least in theory, could 

provide the platform for delivery of a tax-based cash rebate: the tax records of the Internal 

Revenue Service (IRS) and the payroll tax records of the Social Security Administration (SSA). 

In very general terms, both agencies’ systems have been designed to accommodate their normal 

year-to-year responsibilities, rather than to calculate, on relatively short notice, the cash 

payments due to a relevant population of taxpayers in excess of 100 million, and then process 

and deliver those cash payments within a short time period. The limitations of available systems 

therefore may affect both the ability of policy makers to target particular populations (e.g., where 

information is not available) and the speed with which cash rebates can be distributed. 

2. Policy goal of who should receive the stimulus rebates 

Which individuals should receive the rebates?

Previous stimulus efforts have been both distributed to taxpayers generally and targeted 

more specifically towards certain taxpayer populations (e.g., beneficiaries of the earned income 

tax credit or child tax credit). It is possible, however, to imagine targeting a tax-based cash 

stimulus to other taxpayer populations as well. For example, the stimulus could be directed to 

any of the following: the group of all filers of income tax returns, all payors of income tax (to the 

extent thereof), a defined subset of all income tax filers or taxpayers, all payroll taxpayers, a 

subset of all payroll taxpayers, individuals not filing income tax returns or making FICA 

contributions (lower-income retirees), and Social Security beneficiaries. 

All persons who file an income tax return.–This group includes all taxpayers filing a tax 

return for a given year, regardless of whether the return shows a net tax liability due. In 2006, 

138 million individual income tax returns were filed. This figure in turn reflects many more 

individuals than that, because spouses and dependents typically file one return. The 138 million 

returns include, however, returns of individuals, primarily children, who were claimed as a 

dependent by another taxpayer, but who were required to file a return in their own names, 

because they earned income above the relevant threshold; in 2006, there were about nine million 

such returns. 

In addition to including individuals who have sufficient income to be required to file a 

return but who have no net tax liability, this group also includes individuals who meet the 

income levels for filing and who do not incur payroll tax liability (such as retirees). This group 

would exclude individuals who have no obligation to file tax returns (those whose incomes are 

below the threshold required to file and are not claiming a refundable tax credit). 

36 
Subset of persons filing an income tax return.–If policy makers believe that some subsets 

of return filers are more likely to spend a cash rebate than other subsets of return filers, policy 

makers may wish to target cash rebates to a subset of all return filers. Using IRS return data, it is 

possible to specifically target a group or groups of income taxpayers. For example, the 2003 

rebate was targeted to those who filed returns with a child eligible for the child tax credit. Of 

course, subject to limitations discussed below, many possible subsets could be defined. The 

1975 cash rebate was limited to those persons with a positive 1974 tax liability. Like 1975, the 

2001 cash rebate was limited to taxpayers who in effect had a positive 2000 or 2001 tax liability 

(after any nonrefundable credits claimed).89 

All payroll taxpayers.–This group includes all individuals who make FICA or SECA 

contributions during a given year. The SSA’s records reflect approximately 160 million persons 

in this category annually. This group includes the working poor that earn income and are 

subject to payroll taxes, but who are not required to file an income tax return. This group 

excludes retirees who are not currently working and paying payroll taxes. 

Payroll taxes are tracked by individual. As a result, the 160 million figure reflects the 

separate status of husband and wife, where both work and pay payroll taxes. It also includes 

dependent children and other dependents who work and incur payroll tax liability. 

Some persons included in this group are subject to the 2.9 percent HI portion of the 

payroll tax, but not the 12.4 percent OASOI portion, because their current employment is 

grandfathered from inclusion in the Social Security retirement system. Examples of such 

persons are employees of certain state governments.90 In 2004, for example, roughly 3.7 million 

person fell into this category. 

Subset of all payroll tax taxpayers.–The payroll tax is based on wages earned, so in 

principle it could be possible to define subsets of payroll tax taxpayers by the amount of wages 

earned. For example, the OASDI portion of the FICA and SECA taxes has a wage base 

limitation ($97,500 in 2007). The JCT staff estimates that, in 2007, some 143 million 

individuals had annual income subject to the payroll tax that was less than or equal to the OASDI 

wage base limitation. 

Those not filing income tax returns or incurring payroll tax liability.–This group includes 

lower-income retirees as well as some unemployed individuals. The JCT Staff estimates that for 

2007 approximately 31 million individuals are not subject to payroll taxes and do not file an 

income tax return. Many recipients of Supplemental Security Income payments from the SSA 

fall into this category. 

 89 As described in Part II, above, the 2001 legislation also provided for a “true up” so that an 

amount equivalent to the cash rebate could be claimed by certain taxpayers on their 2002 return if they 

had not received a cash rebate. 

90 Certain Federal employees are also exempt from OASDI. These include Federal employees 

covered under the Civil Service Retirement System (the predecessor of the current Federal Employee 

Retirement System). Employees in certain local government employment also are exempt. 

37 
Social Security beneficiaries and recipients of Supplemental Security Income.–This 

group includes all those currently receiving benefits from the SSA, regardless of whether they 

receive retirement, disability, or survivorship benefits. These individuals may or may not file 

individual income tax returns and may or may not have a current payroll tax liability. 

Distribution of income taxes and employment taxes

Many different statistics are employed to measure the number of U.S. taxpayers. While 

useful in specific contexts, not all of the reported figures are comparable. For example, as 

described above, the SSA reports that there are approximately 160 million persons with earnings 

subject to FICA or SECA taxes in the U.S. population. Most, but not all, of these individuals 

also appear on income tax returns that are filed. 

Table 6, below, includes the JCT Staff’s estimates of the number of individual income tax 

units in the United States by different tax characteristics. An “income tax unit” follows how 

taxpayers choose to file their returns—for example, as joint, head of household, or single filers. 

For individuals in the U.S. population who do not file returns, the JCT Staff assigns a filing 

status on the basis of a statistical model. A dependent who files his/her own return is counted as 

a separate income tax unit. 

The first row of Table 6 shows an estimate of the total number of income tax units in the 

U.S. population. The second row estimates the number of these income tax units who will not 

file a return in 2007. The third row shows an estimate of the number of income tax units who 

will file returns in 2007. 

Table 6.–Selected Estimates of the Number of Income Tax Units, 2007 

Values in Millions 

Number of income tax units(1) 165.0 

Less income tax units who do not file tax 

returns 28.8 

Equals number of income tax units who 

file tax returns 136.3 

Number of income tax units filing returns 

showing a positive income tax liability 93.9 

Number of income tax units filing a return 

showing a zero income tax liability 16.1 

Number of income tax units filing a 

return showing a “negative” income tax 

liability from refundable credits 26.3 

Source: Joint Committee on Taxation. Details may not add to total due to rounding.

1 An income tax unit comprises those individuals who actually file one tax return, or who would 

file a tax return if the adjusted gross income threshold for being required to file a return were set at 

zero. For example, a husband and wife (not themselves claimed as dependents on another’s return) 

and their minor child who is their dependent constitute one income tax unit, regardless of whether 

the family is obligated to file a return.

38 
39 

 

Table 7, below, summarizes the distribution of individual income taxes and payroll 

(FICA and SECA) taxes by reference to taxpayers’ incomes (measured as reported on income tax 

returns). The individual income tax and payroll taxes are designed with different policy 

objectives. The individual income tax provides the primary revenue base for the general 

operation of the Federal government, while the payroll taxes fund dedicated social insurance 

trust funds. Table 7 shows that the two types of taxes represent very different portions of the 

aggregate Federal taxes paid by income tax units at different income levels. 

The JCT Staff estimates that for 2007, of the approximately 165 million income tax units 

as shown in the first row of Table 6, approximately nine million are individuals who are required 

to file a separate return but are claimed as dependents on another’s return, and approximately 

two million are returns of taxpayers with negative adjusted gross income. The JCT Staff 

distributes the remaining 154 million income tax units by income in the second column of Table 

7. These 154 million returns include tax returns of persons with zero income tax liability. After 

removing these taxpayers, the third column of Table 7 shows the distribution of the remaining 

115 million income tax units. The 115 million income tax units in the third column either have a 

positive income tax liability or claim a refundable tax credit. 

Because Table 7 does not report returns of dependent filers,91 the 154 million income tax 

units reflected in Table 7 do not include all persons with a payroll tax liability. As previously 

noted, the SSA reports that approximately 160 million persons annually are credited with payroll 

taxes paid. However, the 160 million persons include working couples who for income tax 

purposes file a joint return. The fifth column of the table counts such couples as one income tax 

unit. Consequently, after deleting dependent returns and counting joint filers as one income tax 

unit, the JCT Staff estimates that, in 2007, 112 million income tax units will have made some 

FICA or SECA contributions. 

91 The 115 million returns shown in Table 7 are less than the sum of the tax returns filed 

with a positive or negative tax liability as shown in Table 6 (the sum of rows four and six). This 

is because Table 7 excludes the filed tax returns of dependent filers while Table 6 includes the 

returns of dependent filers. 
40 

Table 7.–Distribution of Individual Income Taxes and Employment Taxes 

Calendar Year 2007 

Total Number 

of Income Tax 

Units[2][3]

Individual Income Taxes[4] Employm

Adjusted Gross Income 

Category[1]

Millions 

Income Tax 

Units[3] 

Millions 

Dollars 

Billions 

Income Tax 

Units[3] 

Millions 

Less than $20,000 ........................... $20,000 to $40,000 ......................... $40,000 to $50,000 ......................... $50,000 to $75,000 ......................... |$75,000 to $100,000....................... $100,000 to $200,000 ..................... $200,000 to $500,000 ..................... $500,000 to $1,000,000 .................. $1,000,000 and over........................ 

 62  32  11  20  12  13  3  1  [7] 

 25  31  11  20  12  13  3  1  [7] 

 -$28  19  34  104  98  236  197  100  280 

 29  28  10  18  11  13  3  1  [7] 

TOTAL 154 115 $1,039 112 Source: Joint Committee on Taxation. Details may not add to total due to rounding. [1] Adjusted gross income includes income from all sources less certain exclusions such as contributions to retirement accou[2] Includes both income tax units that file and do not file income tax returns. Individuals who are dependents of other taxp

to file a separate return) and taxpayers with negative income are excluded. 

[3] An income tax unit comprises those individuals who actually file one tax return, or who would file a tax return if the adju

threshold for being required to file a return were set at zero. For example, a husband and wife (not themselves claimed as d

return) and their minor child who is their dependent constitute one income tax unit, regardless of whether the family is obli

[4] Individual income taxes are net of refundable tax credits. [5] Employment taxes include the employee and employer share of FICA taxes and SECA taxes. [6] This tabulation does not include all employment taxes paid by individuals who do not file income tax returns. A reliable 

employment taxes paid by these individuals is not currently available. 

[7] Fewer than 500,000 income tax units. 
The discussion above also indicated that there are persons who earn wages, and thereby 

generally are subject to payroll taxes, but who do not file an income tax return. Some of these 

persons in fact have income tax liability and intentionally do not file required income tax returns, 

but most such persons are not required to file tax returns. Table 8, below, provides more 

information about these individuals. 

Table 8 reports JCT Staff projections for 2007 of persons with no income tax liability 

including persons who may claim refundable tax credits. The top half of the table categorizes 

income tax units that alternatively file a return or do not file a return by reference to whether (or 

not) the units have wage income (and therefore payroll tax liability). The bottom half of the 

table reports similar data by number of persons. 

The JCT Staff estimates that in 2007 there were approximately 66.3 million income tax 

units (representing 80.8 million persons) who either report no income tax liability or claim a 

refundable credit. The 66.3 million income tax units include approximately 37.5 million returns 

that will show no income tax liability (or that claim a refundable credit); approximately 28.8 

million units will not file returns. The majority of the returns shown in column one are filed to 

claim refundable income tax credits. 

As column one of Table 8 shows, approximately 32.8 million individuals with wage 

income will not have an income tax liability, but will file an income tax return. Phrased 

differently, Table 8 shows that most income tax units (or persons) without income tax liability 

but with wage income do file income tax returns. Conversely, most nonfilers have no material 

wage income. 

The 66.3 million income tax units reported in Table 8 include approximately 26 million 

income tax units who are estimated to claim refundable credits. That fact means that roughly 40 

million income tax units reported on Table 8 have zero income tax liability and do not claim 

refundable tax credits. Subtracting this figure in turn from the 154 million income tax units with 

which Table 7 begins ties Table 8 back to Table7, because Table 7’s column totals show 115 

million income tax units with positive tax liability or with refundable tax credits. 

The JCT Staff continues to research the underlying methodologies whose results are 

summarized in Table 8. In particular, while the preliminary results of our ongoing research are 

consistent with the total number of income tax units and persons reflected in Table 8, that 

ongoing research also suggests that the existing methodology understates significantly the 

number of income tax units (and persons) who have wage income but do not file income tax 

returns. Wage and payroll tax liability information for persons who do not file tax returns is 

quite limited. As a result, Table 8’s estimates of persons not filing a tax return should be used 

with caution. 

41 
Table 8.–Income Tax Units and Individuals with No Reported 

Income Tax Liability, 2007 

Values in Millions 

Filing 

Return 

Not Filing 

Return Total 

Income Tax Units(1)(2)

 With any wage income/payroll 

 tax liability(4) 29.4 0.6 30.0 

 Without wage income 8.1 28.2 36.3 

 TOTAL 37.5 28.8 66.3 

Workers/Number of Individuals(3)

 With any wage income/payroll 

 tax liability(4) 32.8 0.7 33.5 

 Without wage income 16.7 30.6 47.3 

 TOTAL 49.5 31.2 80.8 

Joint Committee on Taxation. 

Details may not add to total due to rounding. 

[1] An income tax unit comprises those individuals who actually file one tax return, or who would file a 

tax return if the adjusted gross income threshold for being required to file a return were set at zero. For 

example, a husband and wife (not themselves claimed as dependents on another’s return) and their minor 

child who is their dependent constitute one income tax unit, regardless of whether the family is obligated 

to file a return. 

[2] Does not include earnings or tax liabilities of dependents who may be associated with 

the income tax unit. 

[3] Excludes dependent filers. 

[4] Excludes income tax units who fail to file required returns. 

3. Administrative capabilities of IRS, SSA and FMS 

This section discusses the administrative capabilities of both the IRS and the SSA to 

compute, process, and pay tax-based cash rebates to a large number of individuals. This section 

describes our understanding of the two agencies’ respective filing seasons, the taxpayer 

information available to these agencies, and general processing resources. 

Neither the IRS nor the SSA directly mails checks to taxpayers. That function is handled 

by the Financial Management Service (FMS), which is the paying arm of the Federal 

government. The ability of either the IRS or the SSA to process and mail checks to taxpayers 

therefore is limited by the capacity available to the Federal government through the FMS. 

42 
Among other duties, the FMS must use its resources to make all the routine vendor 

payments of the Federal government, provide for the delivery of Social Security payments, and 

provide regular tax refund checks (or direct deposits) to taxpayers. The FMS also uses an offset 

program that institutes levies against Federal and State tax delinquencies and non-tax debts (such 

as delinquent child or spousal support payments). The FMS believes that beginning 

approximately in June, after the majority of annual tax refunds are issued, it would have capacity 

to process and mail eight to nine million paper checks per week. This capacity constraint 

explains why the 2001 tax rebate was distributed over a 10-week period. 

Internal Revenue Service

The IRS has begun its current (2007) filing season. The filing season begins during 

January with early filers and builds to its peak on April 15th. The peak filing season concludes at 

the end of May after processing the returns filed on April 15th and making refund payments. 

During this time IRS will process over 130 million individual income tax returns and authorize 

refunds totaling over $250 billion. The filing season generally concludes after processing 

extended returns that are filed by October 15th. 

Each year, the IRS develops a specific processing system for that year’s tax returns, 

reflecting the tax laws in effect for that year. Because of the complexity of the tax Code, and the 

interaction among many of its provisions, the development and testing of this system is a time 

and resource intensive undertaking. Once a filing season has begun, the processing system for 

that year is essentially “locked down.” This means, for example, that if the Code were to be 

amended in February 2008 to give a retroactive credit or rebate for 2007, the IRS would not be 

able to adjust its processing system for 2007 returns that had not yet been filed. 

The IRS performs several important functions when processing tax returns. For example, 

the processing system performs procedures to check for and correct math errors. The processing 

system also checks for various anomalies, and performs a number of checks on various tax 

benefits claimed by taxpayers. Thus, for example, the processing system automatically checks 

the Social Security numbers of children for whom the child tax credit is claimed against the 

SSA’s master list of social security numbers. The processing system also contains a program 

that offsets any refund shown as due against amounts owed to the Federal government. For 

example, the processing system automatically offsets refunds claimed against unpaid prior year 

Federal tax liabilities. 

During the peak filing season, the IRS can process up to roughly 15 million tax returns 

per week. The IRS’s systems post successfully processed returns every Sunday. If a refund is 

owed, that information is conveyed to the FMS on Tuesday. If the taxpayer has arranged for 

direct deposit (electronic funds transfer, or EFT) of a refund, the FMS ordinarily makes the EFT 

on Friday. If the taxpayer has not arranged for EFT, then a paper check is mailed one week later 

(the following Friday). Thus, in the ordinary course of a filing season, a taxpayer receives a 

paper check roughly 10 days after the taxpayer could have received an EFT – and of course at 

that point the taxpayer still must deposit the check. 

The IRS expects that roughly 60 million taxpayers will use EFT for their 2007 refunds. 

Of this number, approximately 20 million represent “refund anticipation loans,” where by 

43 
agreement the refund goes to a special account owned both by the taxpayer and the financial 

institution making the loan. These accounts are not suitable for the delivery of subsequent 

rebates for which refund anticipation loans have not been advanced. This leaves, however, a 

universe of approximately 40 million taxpayers who could obtain a rebate in 2008 electronically, 

if the relevant tax year that was used to calculate the rebate amount was 2007. 

Once a return is processed, the data is stored by the IRS in two principal databases: a 

master file database for each taxpayer as well as separate databases for each filing season (e.g. 

2006, 2007, etc). The master file is a summary file that includes each taxpayer’s identification 

number, current address, and account balance (amount due the IRS or refund due the taxpayer). 

The IRS also maintains taxpayer data by return filings. Thus, family units may be linked if joint 

returns are filed and children will be linked through a dependency exemption. 

The transaction file for each filing season contains each taxpayer’s primary Form 1040 

tax characteristics. The transaction file includes most items located on Form 1040, which 

includes EFT information for an estimated 60 million taxpayers. Information not in an annual 

transaction file is not readily available to the IRS to use in connection with the calculation of a 

tax-based cash rebate. In particular, the 2007 IRS transaction file will not contain information 

about the FICA (payroll) contributions made by taxpayers until many months after the peak 

filing season is finished, after the SSA reconciles all the information furnished to it. As a result, 

the IRS will not be in a position in the first half of 2008 to calculate the sum of a taxpayer’s 2007 

income and payroll tax liabilities. 

These IRS databases are static; once a tax return is processed, therefore, a separate 

processing system must query the databases to calculate any tax-based amount, such as a rebate. 

If the IRS is requested to process a tax-based stimulus rebate, it must therefore build an 

appropriate calculation engine and data processor, just as it does for each taxable year in the 

ordinary course. The time required to build and test this processing system will depend on the 

complexity of any rebate package passed into law, but the IRS has advised us that it anticipates 

taking at least 60 days to develop the requisite system. The IRS could undertake this work in 

parallel with its processing of 2007 tax returns during the peak tax return season (which, as noted 

earlier, runs until some time in May). 

In sum, in order for the IRS to calculate, process and direct the FMS to pay a tax-based 

cash rebate, the IRS must first build and test a special purpose processing system, the IRS must 

be able readily to obtain the requisite information contemplated by the new law, and the IRS 

must have the systems resources effectively to reprocess the roughly 130 million returns it had 

already processed for the year selected. The IRS’s systems are today completely committed to a 

seven-day a week schedule of processing 2007 tax returns as they are received. This means that, 

even if the Congress were to base a 2008 tax rebate on the 2006 tax return file, the IRS would 

not be able to begin the actual processing of those rebates until the conclusion of the peak 2007 

tax return filing season. 

The IRS has a significant customer service call center that handles taxpayers’ questions 

on a regular basis. Based on the 2001 experience, the IRS anticipates that a 2008 rebate will 

generate a substantial surge in calls to that center. In connection with a rebate, taxpayer service 

44 
representatives will need to be trained, and to have access to the requisite information to explain 

to callers how a particular rebate was calculated. 

Social Security Administration

The SSA is currently in the middle of its filing season as well. In particular, the SSA 

must post 2007 FICA contribution information to individual accounts. Additionally, the SSA is 

expecting a significant increase in Social Security disability and retirement benefit applications 

attributable to worsening economic conditions and due to the fact that the first baby boomers are 

just turning age 62. 

Wage withholding (FICA) tax information is provided to the SSA directly by employers, 

not individual employees. The SSA checks and processes these employer returns in a manner 

roughly analogous to how the IRS handles individual income tax returns. The IRS provides 

SECA (self-employment tax) information to the SSA from individuals’ tax returns. 

Historically, the SSA posts 77 percent of accepted W-2s from the prior calendar year by 

the end of April. The peak season generally concludes by June 1st. The remaining W-2s, and 

SECA contributions, are posted as they are accepted for filing by the SSA system; each year’s 

records are not completely reconciled until near the end of the following year. 

The SSA maintains a database of individual payroll tax records as well as a database of 

those receiving Social Security disability and retirement benefits. The SSA maintains electronic 

funds transfer information for some current Social Security benefit recipients. 

During the course of every year, the SSA mails earnings history statements to individuals 

over the age of 25 who made payroll or SECA contributions in prior years and who are not 

receiving Social Security disability or retirement benefits. The SSA does not maintain a 

database of addresses for these millions of individuals. Instead, the SSA relies on the IRS to 

provide this information. In particular, the SSA queries the IRS each week for the addresses of 

roughly three million individuals who made contributions in prior years, so as to be able to mail 

each an annual earnings history statement. The IRS provides the requested addresses to the SSA 

from the IRS’s master file of tax return filers. By law, the SSA does not retain those addresses 

after they have been used for purposes of mailing the annual statements. 

Historically, the SSA has found that it cannot mail about nine percent of annual earnings 

history statements, because the IRS does not have an address for that contributor. In turn, many 

annual earnings history statements mailed by the SSA are returned as undeliverable, so that in a 

typical year, only about 85 percent of the potential universe of recipients of these statements 

actually receives them. 

There are many good reasons that explain this significant attrition. For example, by 

spreading out its mailings over the course of a year, the SSA necessarily queries the IRS for 

addresses that might be up to one year old. In addition, the SSA attempts to mail earnings 

statements to individuals who made payroll or SECA contributions in the past, but who were not 

part of the workforce in the immediately preceding period. Nonetheless, this significant attrition 

is a useful reminder of the difficulties engendered for a population as mobile as that of the 

United States in using address information that is not absolutely current. 

45 
The system described above means that neither the SSA nor the IRS has any address file 

for individuals who made payroll or SECAcontributions in a year, but who did not file tax 

returns. Moreover, the SSA does not have information regarding marital status, family size, and 

income other than wages. 

Unlike the IRS, the SSA does not have any occasion to refund money to or audit 

individuals who make Social Security contributions. As a result, its calculation and payment 

systems are oriented entirely to Social Security recipients, not contributors. The SSA also has a 

limited customer service capability for fielding questions regarding cash rebates. 

In sum, the SSA is well situated to make rebate payments to existing recipients of the 

benefit programs it administers. This includes both the SSI program (which provides benefits to 

some of America’s lowest income individuals) and the much larger Social Security payment 

system to the elderly and disabled. The SSA does not have any special ability to process cash 

rebates to other individuals. Neither the IRS nor the SSA has addresses for those individuals 

who make Social Security contributions but who do not file income tax returns because their 

income levels are below the income tax filing thresholds. 

4. Designing a tax-based rebate in light of administrative constraints 

This section discusses four design choices in effectuating a tax-based cash rebate 

stimulus, in light of the information summarized earlier: (1) using income tax versus payroll tax 

rolls; (2) which tax base year to use; (3) how much time is required to develop the necessary 

systems; and (4) how much time is required to deliver the desired cash rebates. 

Income tax rolls versus payroll tax rolls

One fundamental policy question is whether the income tax rolls or the payroll tax rolls 

can better reach the group that the Congress wishes to target for the tax-based cash rebate. This 

section does not address that policy issue, but rather focuses on the narrower issue of which 

agency has access to the most individuals, more complete information, more current information, 

and better options for payment methods. 

The IRS system generally has records relating to a smaller pool of individuals than does 

the SSA. However, in practice the SSA has no incremental information concerning the roughly 

33 million FICA tax contributors who do not file income tax returns, because all of the SSA’s 

address information for these individuals is derived from the IRS. Moreover, only the income 

tax base permits policy makers to use filing status, marital status, family size, and the various 

subcomponents of income (e.g., earned income) in designing and targeting tax-based cash 

rebates. As discussed in further detail below, the availability of EFT account information is 

another primary benefit of using income tax information. 

If the Congress wishes to relate the size of tax-based cash rebates to the total amount of 

taxes paid by individuals in 2007, meaning the sum of income tax liability and Social Security 

contributions, then an important administrative problem will be created, because, while the SSA 

will have processed and posted roughly 77 percent of 2007 W-2s by the end of April, 

individuals’ FICA tax contributions are not reflected in the IRS’s transaction file for the year 

46 
until much later in 2008. The only readily apparent solution to this would be to use 2006 data, 

but this in turn has other important negative administrative implications, as described below. 

The SSA has the advantage of having a current system of distributing benefits, but this 

advantage would be limited to those currently receiving benefits. This suggests that the SSA 

could play an effective role in distributing tax-based cash rebates to SSI recipients (who are 

among America’s lowest incomes) and to Social Security benefit recipients. In other cases, the 

IRS appears to have more current information and greater distribution capability, and the income 

tax base appears to offer the possibility of more refined targeting of benefits, should that be 

desired. 

Which tax year is best?

In designing any tax-based cash rebate, the Congress must select a base year whose 

income tax returns can serve as the database for identifying recipients of the rebate and for 

calculating the amount payable to each such recipient (at least preliminarily). Depending on the 

policy goals of the Congress in targeting rebates, a case can be made to look to 2006 year income 

tax returns, 2007 year returns, and the 2007 year with a true-up in 2008 year returns as the basis 

for the cash rebate. 

The advantage of the 2006 tax year is that the filing season is complete. By using the 

2006 year as the base, the Congress could, should it wish to, make cash rebate payments 

available to any 2006 return filer, regardless of tax liability in that year, without causing an 

unwanted tax return filing behavioral response to the stimulus. 

If, on the other hand, the Congress were to enact legislation in February 2008 that made 

rebates available to every individual who actually filed an income tax return in respect of 2007, 

or even every person who was required by law to file a return for 2007, then the JCT Staff would 

anticipate that a very large number of 2007 returns would be filed that otherwise would not have 

been filed. In this connection, it should be noted that the IRS does not ordinarily devote many 

resources to looking for cases of low-adjusted gross income returns that are filed in which 

income is improperly overstated. A large 2007 rebate conditioned on having a filing obligation, 

however, can be expected to induce just such behavior. 

There do not appear to be any other advantages to using 2006 as the base year, and there 

are a number of important practical disadvantages in doing so. Because the IRS cannot actually 

process rebates until the peak 2007 tax return filing season is complete, there would be no gain in 

the timeliness with which refund checks are distributed by using 2006 rather than 2007 as the 

base year. 

The U.S. population is mobile, and many taxpayers change their filing status or have 

changes to the amount of income that they earn over the course of two years. (JCT Staff 

estimates that, from one year to the next, approximately eight percent of taxpayers either change 

their filing status on account of marriage, divorce, and mortality or have other changes that result 

in no longer filing a tax return.) 2006 address information thus will be staler than 2007 

information. The IRS can perform “address hygiene” to the 2006 file in parallel with the 2007 

47 
peak filing season, including updating the file from the US Postal Service’s master change of 

address database, but the 2006 information will never be as accurate as the 2007 address file. 

Similarly, the use of older taxpayer information will mean that the targeting of cash 

rebates to taxpayers in general will be less precise, as individuals’ status changes from year to 

year. This problem in turn could be addressed by making the rebate a 2008 rebate, using the 

2006 file simply as a preliminary distribution mechanism, and then offering a true-up on 2008 

tax returns filed in 2009. Based on precedent, however, the true-up would be a one-way 

adjustment, so that taxpayers would emerge with the better of their 2006 or 2008 base-year 

entitlement. And any 2009 true-up probably would be viewed as falling outside the window of a 

timely cash stimulus. 

The problems of mis-targeting through the use of stale data is particularly acute at lower 

income levels, as reflected in programs like the earned income tax credit, the composition of 

whose population is quite volatile. JCT Staff estimates, for example, that if tax year 2006 earned 

income credit eligibility were to be a criterion for receiving a rebate in 2008, as many as 44 

percent of persons currently eligible for the earned income credit would not receive any rebate. 

Finally, if a tax-based cash stimulus were to be based on 2006 returns, with or without a 

2008 year true-up, then it would not be possible to use direct deposit to distribute the rebates. 

The IRS has advised us that 2006 EFT data is too unreliable at this point to use for significant 

cash payments, and there appears to be no practical way to quickly solicit new information 

without exposing the program to the risk of large amounts being misdirected through identity 

theft. 

The advantages of basing a tax-based cash rebate on the 2007 tax year is that the relevant 

data are the freshest available, and that doing so will not delay the distribution of the rebate, 

since the IRS cannot begin that distribution in any event until the 2007 peak filing season is 

complete. The use of 2007 as the base year also allows EFT processing of roughly 40 million 

rebates, which effectively will shorten the overall rebate distribution process by five weeks or 

more. The 2007 address file also is more accurate than the 2006 file, which will allow current 

addresses to reach a larger percentage of the remaining taxpayers. Moreover, the ability to 

accurately target specific groups of taxpayers will be significantly increased. 

The only practical disadvantage of using 2007 as the base year would arise if the design 

of the particular rebate program chosen were to encourage undesirable tax return filing behavior 

(for example, by taxpayers not required to file a return filing one simply to claim a rebate). In 

this connection, it is helpful that the standard IRS processing system for 2007 (and prior years) 

performs a number of important consistency and accuracy checks on the two principal 

refundable tax programs today: the earned income tax credit and the refundable portion of the 

child tax credit. 

The advantage of using 2008 as the base year (that is, following the 2001 precedent and 

making rebate payments based on 2007 with a true-up on the 2008 tax return when filed in 2009) 

is that the program would be equitable. One argument against such a true-up mechanism is that 

it violates the goal of a timely stimulus and adds complexity; another is that it would add cost, if 

48 
the 2001 and 2003 “one-way” true-up model were followed, so that taxpayers are not required to 

pay back rebates to which in retrospect they were not entitled. 

Regardless of the tax base year used, some taxpayers will be confused. In 2001, for 

example, Commissioner Rossotti wrote in a letter to the Chairman of the Senate Finance 

Committee that the “IRS will receive a large volume of additional phone calls due to people not 

understanding whether they can claim an additional credit on the 2001 return, wanting to know if 

they will receive the additional rebate, asking questions about when they will receive the 

additional rebate, needing help doing computations for the additional rebate, etc. We received 

23.8 million telephone calls between July and September (2001) compared to 11.4 million during 

the same period last year.”92 

In conversations with the JCT Staff, senior representatives of the IRS have indicated that, 

while confusion will be unavoidable, they do not believe that enacting a well-designed rebate 

program would lead to unusual problems for the 2007 filing season, provided of course that 

whatever the Congress enacts is designed as a separate rebate calculated after the 2007 returns 

are filed. The IRS has stressed to us, however, that, because there will be confusion, simpler 

rebate calculations are better from a tax administration perspective. 

Time required to develop systems for cash rebates

As noted earlier, the IRS has informed us that the IRS would need a minimum of 60 days 

from the date a tax-based cash stimulus is enacted to build and test their processing system for 

the rebate. The 60 day timeframe is an estimate and the true timeframe will be dependent on the 

complexity of the proposal being considered. The IRS has the ability to design and test a rebate 

mechanism while the 2007 tax year processing is ongoing. While the 2008 processing system 

would not be identical to that used in 2001 or 2003, the IRS would be able to draw on lessons 

learned from those experiences in developing the necessary system. In 2001, an important point 

was made by Commissioner Rossotti: “compression of analysis, testing, and production of 

complex programs poses very high risks of errors in issuing these refunds, such as taxpayers 

receiving incorrect amounts or notices with incorrect information.”93 

Also as noted earlier, the IRS has further informed us that it absolutely cannot begin the 

actual processing of cash rebate amounts prior to the conclusion of the 2007 tax year filing 

season some time in mid to late May 2008 (regardless of the base filing year chosen). 

Time required to deliver cash rebates

As discussed previously, the IRS has informed us that it could not begin processing taxbased cash rebates prior to the conclusion of the peak 2007 tax return filing season, regardless of 

the base year chosen. The SSA should be able to distribute rebates to current beneficiaries more 

 92 Letter from Commissioner Charles O. Rosotti to the Honorable Charles E. Grassley dated 

October 19, 2001,Tax Analysts Document 2001-27234. 

93 Ibid.

49 
quickly than that, but, as noted, those populations comprise only the SSI beneficiaries and the 

elderly and disabled receiving Social Security benefits. 

In an ordinary year, the peak tax return filing season concludes at the end of May. In 

2001, the first rebate checks were mailed in the third week of June, and the total distribution took 

about 10 weeks, due to check processing limitations at the FMS (whose capacity, we understand, 

remains roughly nine or ten million checks per week). It might be possible to compress the peak 

return tax filing season slightly, but it is important to remember in this regard that the regular 

personal income tax filing season brings in more than $1 trillion of government revenues, a 

number that dwarfs any tax-based cash rebate under consideration. Moreover, the amount of 

income tax refunds paid by the US Treasury to individual taxpayers in connection with the 

regular filing season (some $229 billion in respect of the 2006 tax year) also greatly exceeds any 

rebate under consideration. It is therefore vitally important that the integrity of the 2007 filing 

season not be compromised by any rebate program that might be adopted. 

Once the processing begins, the actual distribution of rebates to individuals would be 

subject to any check processing limitations imposed by the FMS. Where available, the use of 

direct deposit information would greatly speed delivery of the stimulus to individuals and reduce 

the cost to the government of printing and mailing paper checks. Based on 40 million EFT 

accounts for the 2007 year, it should be possible to accelerate the delivery of a tax-based cash 

stimulus four or five weeks faster in 2008 than in 2001. 

50