Stabilization or Stimulus? Making Sense of Economic Relief Measures

  • March 27, 2020

Today, the House of Representatives approved the latest version, after passage in the Senate yesterday. Soon after, the president signed it into law.

Late last week, the forthcoming “Phase III” coronavirus economic stimulus proposal was relabeled as an economic stabilization bill. The name change was a subtle but extremely helpful clarification during a crisis brimming with uncertainties. During abrupt economic shock and disruption, halting economic decline takes precedence to growth, so stabilization must be the priority. Today, after a week-long negotiated travail, the House of Representatives approved the latest version, after passage in the Senate yesterday.

Soon after, the president signed it into law. It has been said that “The Coronavirus Aid, Relief, and Economic Security (CARES) Act (HR 748)” will be the first of perhaps two or three more relief measures to come.

Understanding the Tax Implications

Tax and business executives will need to make similarly crucial clarifications as they parse economic relief measures put forth in the coming days, weeks and months by federal, state and local legislators. These new projected relief laws and economic adjustments will contain temporary fiscal measures and tax provisions specifically designed to improve the weakened economy.

However, while the intention of those provisions will be to deliver tax relief to businesses and individual taxpayers, there will be unintended consequences, many foreseeable and others unexpected — some with short-term impact, but others with longer-range implications. Tax executives will need to understand these regulations, as all fiscal relief generally comes at a higher price down the road.

Although economic relief is now a forgone conclusion, as it is an unquestionable necessity at present, we should not doubt that economic and social stabilization and the subsequent recovery will be very expensive.

Practical Questions to Help You Better Understand the Impacts

I’ll refrain from examining the CARES Act, as a stimulus package, and instead share with you a set of practical questions to ask about economic relief measures to better understand their impacts, positive and negative, to your business, your industry and the larger economy over time.

  • Is it a stabilization or a stimulus?

  • What is the objective of the stimulus?

  • What are the future impacts?

  • What is the lag time?

Is it a stabilization or a stimulus?

Some measures are designed to stabilize deteriorating economic conditions; others are crafted to stimulate growth. The former are often, but not always, designed quickly and under pressure and can, as a result, produce spillovers and harmful side effects, which can actually precipitate or accelerate the likelihood of a steeper recession.

What is the objective of the stimulus?

Legislative stimulus packages are mainly intended to accelerate economic growth and even jump-start economies. Laws designed to genuinely stimulate growth are distinct and drafted to stabilize economies. In times of economic free- falling, stimulus must come after stabilization, driving the restoration of a functional market balance (equilibrium).

What are the future impacts?

Sweeping economic relief measures — whether they center on monetary policy, tax policy, or credit market adjustments or remedies—almost always cause major future impacts, some of which will be beneficial and others that will be problematic. Some of the implications are foreseeable, while others will be unexpected; this is where the peril lies. As a basic example, a large unexpected tax cut today stands a chance of creating the need for state and federal governments to increase their revenue streams down the road. Eventually, all deficits will be refinanced, either with tax revenue or by borrowing. In the end, the taxpayer pays the debt.

What is the lag time?

Little in economics occurs in “real” time, although this particular calamity obliterated the global economy in little time. While the long-term implications of major policy shifts can be determined with a fair amount of accuracy, when those results materialize (the lag time) is much less certain and dependent on a range of interrelated economic, trade, social and legal forces. A basic estimate of foreseeable lag time can help companies prepare to mitigate negative impacts before they materialize.

Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.

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