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An Outlook

As Americans (along with the rest of the world) struggle with the economic crisis, actions, plans, plans for actions, etc. bombard us each and every hour of every day. How we arrived at this point needs to be left for future discussion; all that matters now is how are we going to escape this mess?

The $700 billion rescue plan, while distasteful, was necessary. But as we have seen in the days since the legislation passed, this is not an answer in itself. This legislation should slowly begin to stabilize the credit markets when it begins being implemented and provisions in the legislation allow for at least the possibility of re-writing many of the individual home mortgages that have – or are – slipping into default. But these will take time, and it will take an even longer time to ease the burdens individual Americans are struggling under. Also, the plan doesn’t begin to address many of the other factors in the economic crisis.

Remember that when the $700 billion rescue plan failed to pass the House of Representatives on the first try, the stock market tumbled. In fact, American investors – and 75 percent of Americans have money in the stock market either through direct or indirect investment – lost $1.1 trillion on that day. And, as I write this column, that market has dropped another 900 points in the first two days of this week (over $2 trillion).

Americans and the American economy need money, and they need it now. Tax credits, tax cuts, etc. are too far out and, ultimately, will be too small to make a significant and expedient difference. So, what’s the answer?

Well, one idea was forwarded to me in an email and – after sorting back through the various forwards – seems to have originated with someone called T. J. Birkenmeier (or Birk as he/she calls him/herself). Birk was upset about the $85 billion bailout of AIG and felt that this money would be better spent on individual Americans. The email approximates that there are 200 million Americans over 18 years of age and if each of these individuals shared equally in the $85 billion, they would be entitled to $425,000 each. Birk’s plan specifies that taxes should be withheld on this amount and, for the sake of simplicity, assumes a 30 percent tax rate. This would mean that $127,500 is withheld from each check and returned to the government via the IRS. The government would then retain $25.5 billion of the original $85 billion commitment and individual Americans over 18 years of age would receive a check for $297,500.

As Birk notes, Americans could take this money and catch up (or get ahead on their mortgage; re-pay college loans; save for college; put money in savings accounts; invest in the market; pay medical bills or premiums; etc.). In other words, this would provide instant help for virtually all aspects of the economy.

The problem is that Birk’s math is wrong: $85 billion divided by 200 million is $425, not $425,000. So throw the Birk plan out the window and let’s turn our attention to the Grutzmacher plan.

Under my plan, the government makes $1 trillion available to every taxpayer who filed a tax return in 2007. According to the IRS Web site, there were 138,893,908 individual returns in 2007, which we will round to 140 million for the sake of simplicity. This means, that when the $1 trillion is disbursed, every tax filer would be entitled to $7,142.86. But, like the Birk plan, we pay taxes on this disbursement; so assuming a 30 percent tax rate, the government is going to withhold $2,142.86 from each check ($7,142.86 x 0.3), and each tax filer will receive a check for exactly $5,000 (yes, the math does work out this perfectly). The total cost to the government, after withholding is then $700 billion, the same amount as the credit market rescue plan.

Okay, $5,000 is a long way from Birk’s miscalculated $425,000, but consider what $5,000 could do this winter in households across America. Consider what $5,000 could do in your own household. Are you wondering how you will pay your heating bill this winter? I’m betting $5,000 would cover most people’s heating with a fair amount left over. Maybe you use the money to pay down a credit card bill, cover a medical bill or insurance premium. Whatever you apply the money to – even if you simply save or invest it – $5,000 is enough to make a difference for most of us, certainly more so than the $600 or $900 check we received this past spring/summer.

The other part of the Grutzmacher plan is to re-instate the credit card interest deduction that was once available on our federal taxes. Cap the deductible amount at $10,000 a year and keep the deduction in place for the next four years at least. Most Americans have too much credit card debt and providing relief in the form of interest deduction on our taxes will allow Americans to realize a greater tax refund that can then be applied to credit card balances (assuming individuals make the smart choice and do so). If the right choices are made, the amount of debt Americans are carrying is reduced and the banks see a greater cash influx.

The deduction may also encourage those who are not carrying debt over month to month, or are not using credit cards at all, to use their cards more often. Banks make money off credit cards and banks need cash. So if Americans are using their cards and paying on their cards, the banks cash flow becomes more reliable.

Will this work? Well, as I said at the outset, the problems are complex and it will require a great deal of initiative, and a great number of initiatives to extricate ourselves from the mess in which we are now mired. What I suggest above is simply one idea and, even if something along these lines was implemented, there will be much more to do.

Still, a $5,000 check would make me feel a lot more comfortable going into this winter.