As Congress nears debate on another round of stimulus/relief aid for American households, businesses, state and local governments, schools, Covid vaccination delivery, and more, I thought it would be instructive to see how the direct aid sent as part of Stimulus 1.0 was spent.
A new report from the IRS shows that the first round of economic impact payments (or stimulus checks) primarily benefited households earning less than $100,000.
This is good news.
By Dave Allen for Discount Gold & Silver
As Congress nears debate on another round of stimulus/relief aid for American households, businesses, state and local governments, schools, Covid vaccination delivery, and more, I thought it would be instructive to see how the direct aid sent as part of Stimulus 1.0 was spent.
A new report from the IRS shows that the first round of economic impact payments (or stimulus checks) primarily benefited households earning less than $100,000.
This is good news.
Congress passed the first round of payments under the CARES Act in March last year, and the Treasury Department began sending payments in early April.
The IRS sent more than 161 million payments, totaling more than $271 billion, according to IRS data. Those payments have yet to be sent to another 8 million households.
The first round of stimulus checks provided a $1,200 refundable tax credit for individuals ($2,400 for joint taxpayers) and $500 for each qualifying child, which was advanced to individuals.
The payments began to phase out at $75,000 for those filing as a single, $112,500 for heads of household, and $150,000 for married filing joint taxpayers at 5% per dollar of qualified income, or $50 per $1,000 earned.
The IRS used 2019 returns, or 2018 returns if the 2019 return was unavailable, to determine payment amounts.
According to the IRS, $203.4 billion, or 75%, of the $271.4 billion in payments went to households with under $100,000 in adjusted gross income.
Another 10% of payments went to households that didn’t have a 2018 or 2019 tax return on file.
Instead, the 22.2 million households without filing information either qualified for payments using the IRS non-filers tool or using information from other government benefit programs (such as Social Security).
The Tax Foundation believes it’s likely that many of the 22-plus million non-filers and federal benefit recipients have incomes below $100,000 — “…indicating the share of payments to households earning less than $100,000 could be higher than 75%.”
Across income categories, households making more than $200,000 comprised just 0.1% (or roughly $271 million) of the total payments.
With about one-third of the payments each going to households with adjusted gross incomes of $0-$29,999 and $30,000-$74,999, these data show that the payments went to those who needed them the most.
Since the first round of payments in early 2020, Congress enacted a second round of payments in December as part of the Consolidated Appropriations Act of 2021.
This round consisted of $600 payments to individuals and qualifying children based on 2019 income.
Like under the CARES Act, these payments begin to phase out at $75,000 for single filers, $112,500 for heads of household, and $150,000 for those married filing jointly.
Because 2.0 consists of smaller individual payments than the first, they phase out to $0 at lower income levels than the first round.
SO, HOW DID PEOPLE SPEND THEIR FIRST STIMULUS CHECKS?
If you guessed food, housing, utilities, personal care and other necessities, you’d only be partially correct.
Yes, the CARES Act was intended to stimulate the economy through the stimulus checks. But according to the New York Fed, only 29% of households spent their first stimulus checks on consumption. Interestingly, almost three-fourths spent their checks to increase their savings (36%) and to repay debt (35%).
Of the 29% of Americans who used their checks for consumer spending, 18% spent on necessary living expenses; 8% spent on hobbies, leisure and vacations; and 3% donated to charity.
Why such a relatively higher savings rate? The Fed points to a few possibilities:
Continued uncertainty about the duration of the pandemic, social distancing rules, restrictions on in-person shopping, and delayed rent and student loan payments (which economists count as consumption).
The 36% who spent their stimulus checks to drawn down their debt, focused on reducing balances on student loans, mortgages, credit cards, auto loans and personal loans.
SIMILAR PATTERNS FOR THE JOBLESS
How did people who were receiving unemployment benefits spend their stimulus checks?
The tens of millions who received pandemic unemployment benefits over the past 9 months reported spending the same on living essentials (consumption) as other households (29%). They saved less (23% vs. 36%), however, because of a lack of other income during the pandemic.
On the other hand, what they didn’t save they used to pay down their debt at a higher rate (48% vs. 35%) than other households. That suggests households used their stimulus checks to improve their personal finances, rather than on non-essential spending.
2ND ROUND TO GO TO MORE SAVINGS AND DEBT REPAYMENT
The Fed also asked respondents how they planned to spend their second stimulus check.
The responses are even more striking: 24% say they’ll spend it on consumption for necessities; 45% will increase savings; and 31% will reduce debt 31%.
Translation: Over three-quarters of Americans will save their second checks or repay more debt. And 17% less households (24% vs. 29%) will spend it to boost the economy.
That 5-percentage point difference is equivalent to about $4-$5 billion in GDP…just in case you were wondering (my estimate).
HERE’S THE POINT
As Congress prepares to debate a third round of stimulus/relief checks — proposals range from President Biden’s call for $1,400 individual payments to a GOP group’s weekend suggestion of $1,000 and some economists’ appeal for either a one-time payment of $3,000 or monthly payments of $300 until the pandemic is over — more people are saying they should be more targeted to those who need them the most.
I agree with the targeting aspect. Does it matter then — i.e., should we care — if the neediest recipients want to spend their checks on basic living necessities or to increase their savings or pay down their debt?
I don’t believe it matters — in the short or long run. Some say the government could require check recipients to spend it to fuel the economy. But aside from legal questions, such a mandate would be next to impossible to enforce equitably. Besides, lowering the nation’s personal debt levels and increasing our savings rate are desirable long-term goals.
The remaining question, then, is how much should the next round of payments be and what should the cutoff thresholds be?
As to the first part of the question, any future payments should be adequate enough to make an impact on eligible households while the pandemic lasts.
Whether the check is for $1,000, $1,600, $3,000 or $300 a month, Congress should consider paying for this part of Stimulus/Relief 3.0 through a temporary increase in income taxes on wealthy Americans.
Now, before you invoke the wrath of the ghost of Ronald Reagan himself, hear me out.
Billionaires in the U.S. have grown their collective wealth by $1 trillion just since last March. That's more than it would cost to send a $3,000 stimulus check to everyperson in the country.
Since the pandemic began, the combined wealth of America's 651 billionaires has jumped by more than $1 trillion, reaching $4 trillion in early December, according to Americans for Tax Fairness.
At the same time, almost 8 million Americans have fallen into poverty since the start of the pandemic through November.
Tax cuts for the wealthy have long drawn support from certain economists and lawmakers who argue that such measures will "trickle down" and eventually boost jobs and incomes for everyone else.
But a new study from the London School of Economics says 50 years of such tax cuts have only helped one group — the rich.
The new paper, by David Hope of the London School of Economics and Julian Limberg of King's College London, examines 18 developed countries — from Australia to the United States — over a 50-year period from 1965 to 2015.
The study compared countries that passed tax cuts in a specific year, such as the U.S. in 1982 when President Reagan slashed taxes on the wealthy, with those that didn't, and then examined their economic outcomes.
The study found that after five years, per capita GDP and unemployment rates were nearly identical in countries that cut taxes on the rich and in those that didn't.
The analysis did uncover one major change: The incomes of the rich grew much faster in countries where tax rates were lowered.
The research concludes that instead of trickling down to the middle and lower classes, tax cuts for the rich may not accomplish much more than help the rich keep more of their riches and exacerbate income inequality.
Co-author of the study Julian Limberg argues that “the economic rationale for keeping taxes on the rich low is weak.
In fact, the economics professor added, “if we look back into history, the period with the highest taxes on the rich — the postwar period — was also a period with [the] high[est] economic growth and low unemployment."
Something to think about, wouldn’t you say?