An immediate economic stimulus plan with no extra taxpayer costs

It is clear that the coronavirus will have serious economic repercussions. There is no doubt that this biological disaster and public health crisis will eventually subside, but its economic impacts could persist longer unless appropriate policies are implemented quickly. An immediate economic stimulus is the key action to preventing a wave of private sector defaults that could further deepen and extend a coronavirus recession.

Prepaying income tax refunds is the quickest and the most advantageous approach for providing a short term economic stimulus and support for households threatened with the coronavirus. About 112 million Americans received an average refund of $2,870 for the 2018 tax year. MarketWatch reports that 52 percent of the TurboTax free filers and almost 46 percent of taxpayers using an Internal Revenue Service assistance program spent their refunds on groceries and monthly home bills, while another slightly smaller portion of taxpayers placed their refunds toward debts.

One consequence of more than 10 years of ultra low interest rates is near record levels of private sector debt. Should the coronavirus continue to interrupt normal business, then consumer and business cash flows will no longer support levels of private sector debt that were sustainable as the year began. Waves of consumer defaults and business liquidations could severely damage the economy and delay recovery once the coronavirus risk subsides. Years of stimulative monetary policies have encouraged a debt overhang that could prove deeply problematic if businesses will be disrupted for an extended period as they have in China and Italy.

Economic stimulus in the form of tax cuts or higher government spending are the traditional medicine for the current economic ills. However, such measures are always delayed by intense political debates regarding the stimulus details, as some politicians argue about deficit impacts while others try to target the benefits to their preferred constituents.

Prepaying tax refunds is a simple way to short circuit the political theater that usually accompanies legislative stimulus packages. Send checks as soon as possible to every tax filer who receives refunds by accelerating their future refunds. Send each household that files a tax return a refund of $5,000, roughly equal to the average refund for the 2019 and 2020 tax years combined, and recoup the expenditures by withholding refunds, or surcharging taxpayers who do not get refunds, starting in 2022, when the economy has already recovered from the coronavirus recession.

The accelerated tax refunds can be fully recovered over several years by partially retaining future refunds or imposing surplus tax payments with no interest penalty on taxpayers who receive no refunds. These prepaid tax refunds will provide a direct economic stimulus where and when they are needed without raising the federal budget deficit. They represent a financing to bridge the coronavirus crisis at close to zero cost.

To avoid the inevitable political squabbles, uniform tax refund checks should be sent to all tax filers who receive refunds without any specific income restrictions. The refunds may have to be adjusted for married couples filing separately so households receive equal checks.

This idea will be criticized because some wealthy taxpayers who do not need temporary stimulus relief will get refunds. But these payments are not an issue since these taxpayers have to repay these refunds. Wealthy taxpayers will likely invest their refunds until their payments are finally due, creating investment inflows that could help to stabilize financial markets, a stimulus similar to Federal Reserve quantitative easing but without the central bank choosing what investments to purchase.

The true cost of temporarily advancing tax refunds is minimal since the government is borrowing at near zero interest rates and will recoup the stimulus expenditures when the economy recovers. This proposal does not change the magnitude of income taxes, only the timing of payments, so it seems an open issue whether it requires legislation in Congress.

Paul Kupiec is a resident scholar with the American Enterprise Institute in Washington. He served as the director of the Center for Financial Research at the Federal Deposit Insurance Corporation and is the former chairman of the Research Task Force for the Basel Committee on Banking Supervision.