The Distributional Effects of Fiscal Stimulus

January 24, 2008

Fiscal Fact No. 118

Note: Numbers have been updated to reflect clarifications regarding income concept used for phase-out range.

The Administration and the Congress have hammered out the major components of a fiscal stimulus package to shore up the flagging economy. The $150 billion package includes two broad provisions: 1) cash payments to most workers with a supplement for those with children, and, 2) bonus depreciation for new business investment in equipment. The cash payments would total roughly $100 billion, while the bonus deprecation provision would fill out the remaining $50 billion of the package.

The cash payment would be $300 for individual workers and $600 for working couples with at least $3,000 in earnings. For those ordinary families who pay at least $600 (singles) or $1,200 (married couples) in federal income taxes, a $600 rebate check would be sent to single earners and $1,200 rebate check to married couples. An additional cash payment of $300 per child also would be provided. A typical family of four, for example, would receive a cash payment totaling $1,800. The cash payment would be limited to married couples with less than $150,000 in taxable income and individuals with less than $75,000 in taxable income. According to the Treasury Department, checks could be mailed by the Internal Revenue Service within 60 days of enactment.

The bonus depreciation provision, which is intended to ensure that business investment does not falter in the weak economic environment, is reported to be similar to the temporary provision enacted in 2002 and expanded in 2003. This provision would allow businesses to write-off immediately 50 percent of the cost of new investment in equipment.

As shown in Table 1, the cash payments would broadly focus stimulus across the population. Households in the first decile would tend to receive below average payments because they may not have sufficient earnings to qualify for the payment. The distributional effects of the bonus depreciation provision are shown in Table 2 and the combined effects of the two provisions are shown in Table 3.

Table 1: Distributional Effect of Cash Payments

Income Decile

Dollar Cut Off for Each Decile

Average Per Household

Average Per Person

Share of Total

Bottom

$11,996

$152

$86

1.7%

Second

$20,010

$418

$218

4.9%

Third

$28,918

$593

$283

6.9%

Fourth

$37,812

$803

$346

9.3%

Fifth

$48,016

$967

$388

11.2%

Sixth

$60,012

$1,129

$425

13.1%

Seventh

$75,400

$1,250

$448

14.5%

Eighth

$97,407

$1,307

$446

15.2%

Ninth

$133,702

$1,335

$440

15.5%

Tenth

$653

$204

7.6%

All Households

N/A

$861

$342

100%

Note: Cash payments of $600 per worker (with at least $3,000 in earnings) and $300 per child would be provided. Only married couples with less than $150,000 in adjusted gross income and singles with less than $75,000 in adjusted gross income would receive the cash payment. Households are ranked by cash money income as defined by the U.S. Bureau of the Census, Current Population Survey.

Source: U.S. Bureau of the Census, Current Population Survey, March 2007 Supplement.

Table 2: Distributional Effect of Bonus Depreciation for New Business Investment

Income Decile

Dollar Cut Off for Each Decile

Average Per Household

Average Per Person

Share of Total

Bottom

$11,996

$60

$34

1.4%

Second

$20,010

$113

$59

2.7%

Third

$28,918

$170

$81

4.0%

Fourth

$37,812

$209

$90

4.8%

Fifth

$48,016

$250

$100

5.8%

Sixth

$60,012

$298

$112

6.9%

Seventh

$75,400

$390

$140

9.1%

Eighth

$97,407

$519

$177

12.0%

Ninth

$133,702

$741

$244

17.2%

Tenth

$1,554

$486

36.1%

All Households

N/A

$431

$171

100.0%

Note: Bonus depreciation would apply to most new investment in equipment. The $50 billion reduction in business taxes under the bonus depreciation provision is allocated to owners of capital in proportion to their dividends, interest and capital gains income. Households are ranked by cash money income as defined by the U.S. Bureau of the Census, Current Population Survey.

Source: U.S. Bureau of the Census, Current Population Survey, March 2007 Supplement.

Table 3: Total Distributional Effect of $150 Billion Stimulus Including Cash Payments and Bonus Depreciation

Income Decile

Dollar Cut Off for Each Decile

Average Per Household

Average Per Person

Share of Total

Bottom

$11,996

$212

$120

1.6%

Second

$20,010

$531

$277

4.1%

Third

$28,918

$763

$364

5.9%

Fourth

$37,812

$1,012

$436

7.8%

Fifth

$48,016

$1,217

$488

9.4%

Sixth

$60,012

$1,427

$537

11.1%

Seventh

$75,400

$1,640

$588

12.7%

Eighth

$97,407

$1,826

$623

14.2%

Ninth

$133,702

$2,076

$684

16.1%

Tenth

$2,207

$690

17.1%

All Households

N/A

$1,292

$512

100%

Note: Households are ranked by cash money income as defined by the U.S. Bureau of the Census, Current Population Survey.

Source: U.S. Bureau of the Census, Current Population Survey, March 2007 Supplement.

Methodology

The cash payments modeled in Table 1 were estimated using tax variables in the Current Population Survey (CPS). Specifically, $600 was allocated to each adult earning at least $3,000. An additional $300 was allocated to households for each child in the household. The cash payments were limited to joint filers with less than $150,000 in income, single filers with less than $75,000 in adjusted gross income, and head-of-household filers with less than $112,500 in adjusted gross income.

The stimulus provided through bonus depreciation for new investment in equipment was allocated using capital income reported in the CPS (i.e., net capital gains plus dividends received plus interest received).

Decile rankings of households were constructed using total cash money income as defined in the CPS for calendar year 2006.


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