Wednesday, February 27, 2008

How to spend the tax rebate

Out of curiosity, I recently checked what search engine keywords were bringing visitors to this blog. One thing that was puzzling me is the frequency of key phrases like "how to spent the tax rebate", "what to buy with tax rebate", and the like.

Why are people even asking these questions? There are two reasons: 1) it is tax filing season, and many people are getting a rebate for overpaid taxes. 2) people are trying to figure out how to spend the upcoming "gift" from the government. I find it scary that people would even ask how to spend that money. But in any case, here is my advice on how to spend it.


It is that simple. If you have no particular purpose for that money and do not know what to do with it, save it! That may sound like a revolutionary concept in the United States where the aggregate savings rate is negative, but you should try it. Most people do not save enough for retirement. Given the government debt and the current fiscal deficits, taxes will have to go up at some point. So why not save ahead of these future tax increases (see the post on Ricardian Equivalence). And if you do not believe that these tax hikes will happen, then consider that government services will need to be cut significantly. So save for shock absorbers on your car, for a better alarm system, for your kids' education, even more for retirement, and constitute a rainy day fund for your health care.

And what about the "tax rebate" to be sent in a few months? My advice is: do not even think of spending it. Even if it is your patriotic duty to spend it. This tax rebate is not a rebate, it is an advance on the regular 2009 rebate. If you spend it, you may regret it during tax season in 2009.

PS: A hilarious spin on a serious issue: the proclamation of the Chattanooga mayor declaring today the "Give Our Georgia Friends a Drink Day".

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