Why loans are better than cash checks to bolster the economy

Congress must quickly advance cash payments to households to prevent further damage to the economy from the coronavirus as workers now find themselves without paychecks. Proposals envision a complicated system of cash payments based on income and number of dependents. Back in 2008, it took about six months for stimulus checks to reach the eligible households. But interest free loans are a better solution. Send the same amount of money immediately to all tax filing households, and sort out the politics and distributional impacts later with subsequent legislation.

When cash payments to households are based on complex criteria such as income and number of dependents, the government of course needs information to determine the payment amounts. This could be obtained from direct household payment applications, but usually the information is extracted from prior year tax returns. Not only does the process take a great deal of time, but Internal Revenue Service estimates are subject to errors if the reported prior year income and number of dependents no longer represent the current household situation in this ongoing crisis.

When a similar program was enacted in early 2008, it took more than two months to issue the first stimulus checks and until the middle of summer for the Internal Revenue Service to process enough authorized payments. The politics that require stimulus check amounts to vary arises because each payment is a direct tax transfer. If identical payments were instead first made as interest free government loans to all tax filing households, disbursements can start immediately. There would be no need for all the information used to determine the stimulus amount for each household.

These interest free government loans will eventually be repaid through a surcharge on future household tax payments once the economy recovers. While such a plan would immediately send checks to all households in the country, wealthy households included, they are loans and must be repaid. Congress can take time to deliberate subsequent legislation to selectively alter household repayment plans in a progressive manner and to turn the loan program into a targeted progressive tax cut if lawmakers so desire.

A stimulus package that uses interest free loans of identical value can be implemented quickly, allowing households in need to meet their expenses without tapping retirement accounts or borrowing from high interest rate lenders. These payments can also be very large, such as $5,000 or more for each household, without causing any sizable increase in the deficit.

Under this program, the cash disbursed is offset by households having a deferred tax liability, provided that these payments are recovered within 10 years. The initial stimulus would have little impact on the current and dynamic budget deficit estimates. It is inevitable that some loans will not be recovered in full, but the cost of household defaults will be far smaller than the cost of a direct payments program fully financed by the deficit.

Some taxpayers think that they are “owed” a check from the government with no repayment obligation because corporations will also be receiving “bailouts” from the government. But business bailouts are usually federal loans that need to be repaid with interest. This proposal gives households an interest free cash advance to help them bridge the coronavirus crisis.

This plan can send cash to households immediately. It also has the added benefit of allowing Congress to turn the program into a retroactive tax cut at a later date if more economic stimulus is necessary. Further, by the time that loan repayments are due, the Internal Revenue Service will then have accurate information on each household that received a tax free loan, so those repayment reductions based on income or number of dependents that Congress might choose to enact can then be implemented properly.

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.