Coupon based tax cuts to boost weak economy

Designing tax-cuts to boost economic activity

With the current slowdown in the economy, various monetary and financial measures were taken to boost economy.

While tax-cuts is one of the easiest ways of fiscal boost, it is also one of the least effective, as the taxpayers mostly end up saving this money rather than spending.

Mark Zandi, chief economist of Moody's Economy.com found that tax cuts delivered the least bang for the buck, with a dollar's worth of a temporary nonrefundable tax rebate worth $1.02 with a one-year lag. Permanent tax cuts yielded less than 50 cents of additional spending.

In contrast, actual spending increases were worth $1.36 if they were disbursed as aid to state governments; $1.59 if the money went on infrastructure; $1.64 for extended unemployment benefits and as much as $1.73 from an increase in food stamps. [Ref: Reuters news, Dec 11, 2008]

An obvious solution that would pop up is, why can't there be other coupons or stamps like the one we have for food; To be used just until the economic recession lasts. Once the economy recovers, the coupons would cease to exist.

There can be coupons for consumer durables, coupons for non-food departmental store purchases, coupons for clothes or anything else. These coupons can be fully or partially tax exempt and may be valid for 6 months to 1 year depending on the government policy.

Thus, since only the purchase of coupons is (fully or partially) tax exempt, every dollar spent on such tax cuts would certainly result in increased spending. Secondly, since the coupons have a definite expiry date, the user would have to spend fast in order to benefit from the tax-cut.

Your comments on the post are most welcome.