What if they just gave us the bailout money?

John W. Schoen Senior producer • Profile • E-mail

With the government's latest handout to investors looking to profit on the bank bailout, more than one reader is wondering: Why doesn't the government just give the money directly to taxpayers?

Why isn't the stimulus money being given to the taxpayers that are going to have to pay for it? I keep hearing that this would be about $500,000 each, which would go to pay off mortgages, buy cars, vacations, you name it. Wouldn't this do more to "kick-start" the economy?
— Gary J., Greenville, S.C.

It sure seems like you and I have somehow gotten left off the list of people getting some of those trillions of bailout dollars the government is handing out.

Maybe it’s because the government isn’t sure exactly how many of us are out here. (More on that in a minute.) But it wouldn’t come close to $500,000 a head. And it’s not clear it would provide the “kick start” we’re all looking for.

So far, the list of bailout recipients includes banks (some of whom got us into this mess in the first place), a failed insurance company (ditto), car companies, foreign central banks, and investors who are getting risk-free loans to profit from buying up bad bank assets. Congress is doling out hundreds of billions more to state and local governments, schools, health care providers and people who build roads and bridges for a living.

To be sure, there is some money in there for individual taxpayers: roughly $360 billion. Most of that money will pay for tax cuts targeted to specific groups — including people with the lowest incomes, first-time home buyers, people whose unemployment benefits are about to run out or the rapidly growing middle-income households who are being victimized by the "alternative minimum tax" originally created to make rich people pay their fair share. Some of these people who are eligible for a tax cut, and don’t owe any taxes, get a “refundable tax credit” (aka “a check.”)

Figuring out how much we’d all get if the government gave the rest of that money directly to taxpayers turns out to be harder than it looks. Though the Federal Reserve has doled out several trillion dollars (so far) that money represents loans backed by collateral that includes other forms of debt. This, after all, is what the Fed does in “normal” economic conditions: it swaps its Federal Reserve Notes (aka “cash”) for U.S. Treasuries held by banks and other “primary dealers” in the financial system.

To pump more money into the system, the Fed usually pays cash for Treasuries; to drain cash, it sells them back. Despite a massive expansion of lending since last September, the only real change has been the types of debt the Fed is accepting and the companies it does business with. The list of both has gotten much longer.

The Treasury, on the other hand, is spending our money and getting no hard assets in return. The $787 billion “stimulus package” is money the government won’t get back. The other big chunk of change, the $700 billion Troubled Asset Relief Plan, or TARP, is being invested in bank stock and, soon, to help investors buy chancey loans and bonds backed by dicey mortgages.

These assets are worth something, but no one knows how much because no one can predict how much further the economy will slide and how many more homeowners will default on their mortgages. If all this paper changes hands at a steep enough discount, the government might actually make money on the deal — which they'll split with investors who took none of the risk. For investors, it's a "heads I win, tails I don't lose" deal.

So far, the money that’s been actually spent (not lent with a good chance of it coming back) comes to about $1 trillion (this year’s $787 billion stimulus package plus the last year's $168 billion stimulus that was mostly paid out as tax rebate checks.)

So how much would every taxpayer get if that $1 trillion went directly to individuals? That’s hard to say. The IRS estimates there will be roughly 154 million individual returns filed in 2008, but many of those are joint returns filed by married couples. Because of the way it collects its data, the IRS can’t say exactly how many people those returns represent. Same goes for the Joint Committee on Taxation – the arm of Congress that handles tax matters. (You’d think Congress would at least want to have a rough estimate of how many taxpayers there are out here.)

The Tax Foundation, a private research group, estimates there are 194 million of us who file income tax returns, individually or jointly, though many don’t end up owing tax. (And some get that "refundable tax credit.") But if you spread $1 trillion evenly over 194 million people, each of us would get a check for $5,154.64.

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