Making Your Tax Rebate Pay

How the dismal science applies to your life.
July 31 2001 3:00 AM

Making Your Tax Rebate Pay

Wanna promote the general welfare? Here's what to do with your tax rebate. 

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My quirky Uncle Sam—the one with the scraggly beard and the multicolored top hats—has taken it into his head to send each member of the family a check for $300, or $600 for married couples. As is so often the case with Sam, his rationale is kind of murky. At first he kept chanting the mantra, "It's not my money; it's your money!" But lately he's been muttering something about stimulating the family's economy. As far as we can make out, he's latched on to some notion that if we all buy things from each other, we can all end up richer.

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There's been some discussion around the dinner table about how best to use this money. Some of us are saying, "I'll use it however I want to, thank you very much; after all, didn't Sam say it was my money?" But in the more socially conscious branch of the family, people have been looking for a way to promote some broader communal good.

So: If your quirky uncle sends you a check for $300, what should you do with it to promote the general welfare?

You could always "stimulate the economy" by blowing your check on, say, a new suit. Doing so would (ever so slightly) bid up the price of fabric and the wages of textile workers. That's good news for anyone who sells fabric or works in the textile industry, which is (as far as anyone can tell) what Sam means by an economic stimulus. But those same price and wage increases are bad news for anyone else who's shopping for a suit. The good and the bad news wash out, so the moral, even from a broad social point of view, is: Buy the suit if you like the suit. Otherwise, don't.

Hardly a satisfying conclusion if you're looking to flaunt your social conscience. So maybe you should just take that $300 and put it in the bank, making it available for other people to borrow. That way, you (ever so slightly) bid down the interest rate, which is good news for anyone who's looking to buy a house or a car. Unfortunately, it's also bad news for anyone who's saving for retirement. Again, the good and the bad news wash out, and the moral is: Save the money if you'd rather have the savings than the suit; spend the money if you'd rather have the suit than the savings; all the other effects are safe to ignore.

If you want to help others with your money, you can't spend or save it. You've got to give it away. But to whom? Use it to feed a starving child, and you'll (ever so slightly) bid up the price of food, which is good for farmers and bad for everyone who shops at a grocery store. Those effects wash out, leaving exactly one thing that matters: You've fed a starving child. If you'd rather feed the child, feed the child. If you'd rather buy the suit, buy the suit. It really is that simple. The secondary effects of your actions are always half-good and half-bad and neither bad nor good on balance.

You could, of course, refuse to cash your check. There's been some controversy in the family about that. Nobody's sure what Sam would do with the money if we declined it. Would he eventually send out another round of checks? Would he buy us presents we'd cherish more than the cash? Or would he just go on a wasteful spending spree? We don't know.

If you're looking to give away your money, and if you want to spread the wealth as far and wide as possible, your best bet is probably to cash the check and then burn the cash. That reduces the money supply, which (ever so slightly) reduces the price level, which is good news for everyone who owns money, with no offsetting bad news. In fact, if you burn $300, you're relinquishing your claim to $300 worth of goods, which then become available to others—so you must be conferring $300 worth of net benefit on the community.

For a long time, we were all so busy sorting through our options—spending, saving, giving away, returning, or burning—that nobody thought to ask where Sam had gotten all this money in the first place. It's not like he works for a living. Eventually we realized he'd gotten it the same place he always gets it—by taking cash advances on our credit cards. Come to think of it, Sam is a lot like the national government, which gets a lot of its money by running up (or failing to run down) the national debt.

Once we'd figured out where the money was coming from, we saw our choices in a different light. After all, if we'd wanted to borrow money to buy a suit or feed a child, we didn't have to wait for Sam to borrow it for us; we could have borrowed it ourselves. It's not like these cash advances have made us any richer. After all, we're going to have to pay them back some day. (Well, to be more precise, they've made us slightly richer since Sam always seems to be able to borrow for us at a better interest rate than we can get for ourselves. But that's very far from saying that taking a $300 cash advance makes you $300 richer.)

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