News reports of the President’s proposed stimulus plan have given us three major pieces of information. First, there would be approximately $50 billion in tax relief for businesses, mostly relating to more friendly treatment of depreciation. Second, the 10% marginal income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate would be adjusted. And third, possibly $800 rebate checks for singles and $1,600 for married couples would be sent out.
While we could find no news report stating exactly how this would work, it appears as if on the individual side, the 10% rate would drop to zero for one year. And then the rebate would work similar to the 2001 rebate checks. Individuals would essentially receive within the next few months an advance rebate check for their 2008 tax return (which would be filed a year from now in spring 2009) equivalent to the amount that they would save from the 10% rate dropping to zero.
This would make sense given the numbers cited because the 10% bracket in 2008 for singles tops out at $8,025, meaning a reduction of the 10% rate to zero would cut their tax bill by $802.50. For married couples filing a joint return, the 10% bracket kicks in at $16,050 (twice that of singles). Therefore, a reduction of the 10% bracket to zero would cut their tax bill by $1,605.
We could be wrong in this analysis, and/or there may be more to it. But one issue that would likely come up in negotations regarding this plan would be that since so many tax returns pay nothing already to the IRS, a reduction in the 10% tax rate would do nothing for them. And these are individuals that are typically low-income.
And furthermore, if this is the way it works and everyone receives the rebate, here’s an interesting question: what about those in AMT?
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