Economic impact payment

What Is an Economic Impact Payment?

An Economic Impact Payment (EIP) is a direct payment made by the U.S. government to eligible individuals and families, primarily intended to provide financial relief and stimulate the economy during times of economic distress. These payments fall under the umbrella of fiscal policy, representing a government's use of spending and taxation to influence the economy. Often referred to as "stimulus checks," Economic Impact Payments aim to boost consumer spending and inject liquidity into the financial system, thereby supporting overall economic growth.

History and Origin

While direct government payments to individuals have historical precedents, the most prominent and recent series of Economic Impact Payments originated in response to the economic fallout from the COVID-19 pandemic. The first round of payments was authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020. This legislation provided eligible individuals with up to $1,200 and an additional $500 per qualifying child. Subsequent rounds of Economic Impact Payments were authorized by the COVID-related Tax Relief Act of 2020 and the American Rescue Plan Act of 2021, providing further direct financial relief. The Internal Revenue Service (IRS) played a crucial role in distributing these payments, often referring to them as "economic impact payments" rather than "recovery rebates" as they were sometimes termed in the legislation itself.¹⁹,¹⁸ The U.S. Department of the Treasury oversaw the rapid disbursement of these funds, with millions receiving payments via direct deposit or prepaid debit cards.¹⁷

Key Takeaways

• Economic Impact Payments are direct government disbursements designed to provide financial relief and stimulate the economy.
• They were prominently used in the U.S. during the COVID-19 pandemic under various legislative acts, including the CARES Act.
• Eligibility for an Economic Impact Payment is primarily determined by Adjusted Gross Income (AGI) and the number of qualifying dependents.
• These payments are structured as an advanced tax credit and are generally not considered taxable income.¹⁶
• Economic Impact Payments aim to increase disposable income, encouraging spending and debt reduction.

Formula and Calculation

An Economic Impact Payment does not follow a universal formula like a financial ratio. Instead, the amount received by an individual or household income is determined by specific eligibility criteria outlined in the authorizing legislation. Key factors typically include:

• Adjusted Gross Income (AGI): Payments generally phase out above certain AGI thresholds (e.g., $75,000 for single filers, $150,000 for married couples filing jointly). The payment amount is reduced by a set percentage (e.g., $5 for every $100) above these thresholds.¹⁵,¹⁴
• Filing Status: Single, married filing jointly, head of household, etc.
• Number of Qualifying Dependents: An additional amount is often provided for each eligible child or dependent.

For instance, the CARES Act provided a base payment of $1,200 for eligible individuals and $500 for each qualifying child under 17. The American Rescue Plan Act of 2021 later increased the payment to up to $1,400 per eligible individual and $1,400 for each qualifying dependent, including adult dependents.¹³

Interpreting the Economic Impact Payment

The primary interpretation of an Economic Impact Payment revolves around its intended effect on the broader economy and individual financial well-being. From an economic standpoint, these payments are a direct injection of funds designed to counteract negative economic shocks, such as a recession. The hope is that recipients will spend these funds, thereby stimulating demand for goods and services, and supporting businesses.

For individuals, the interpretation often varies based on their immediate financial situation. For those facing job loss or reduced hours, an Economic Impact Payment can serve as a vital lifeline, covering essential expenses and preventing deeper financial hardship. For others, with more stable finances, the payment might be saved, invested, or used to pay down unemployment or existing debt. Research by the Federal Reserve Bank of New York found that households used a significant portion of their Economic Impact Payments for saving and debt reduction, in addition to consumption.¹²

Hypothetical Example

Consider a hypothetical family, the Johnsons, consisting of a married couple and two qualifying children. In 2020, their Adjusted Gross Income (AGI) was $140,000. Under the CARES Act, which authorized an Economic Impact Payment of $1,200 per adult and $500 per qualifying child, with a phase-out starting at $150,000 AGI for married couples:

1. Base Payment: $1,200 (Mr. Johnson) + $1,200 (Mrs. Johnson) + $500 (Child 1) + $500 (Child 2) = $3,400.
2. AGI Threshold: Their AGI of $140,000 is below the $150,000 phase-out threshold for married couples.
3. Total Economic Impact Payment: Since their income does not trigger a reduction, the Johnsons would receive the full $3,400. This influx of cash could be used to cover household expenses, contribute to savings, or reduce outstanding debts, boosting their immediate purchasing power.

Practical Applications

Economic Impact Payments serve as a potent tool in government economic policy, primarily as a form of stimulus package during downturns. Their practical applications include:

• Countercyclical Policy: During economic contractions, EIPs help inject demand directly into the economy, aiming to prevent or lessen the severity of a Gross Domestic Product (GDP) decline.
• Household Financial Stability: They provide immediate financial relief to individuals and families who may be facing job losses, reduced income, or increased expenses. This helps maintain basic living standards and prevents widespread financial distress.
• Boosting Aggregate Demand: By increasing the money supply in consumers' hands, EIPs are intended to encourage spending, which supports businesses and employment. Research from the Federal Reserve Bank of Dallas indicates that stimulus payments significantly boosted personal disposable income and consumer spending during the pandemic.¹¹
• Facilitating Recovery: Beyond immediate relief, these payments can help set the stage for a quicker economic recovery by stabilizing household finances and maintaining consumer confidence.

Limitations and Criticisms

Despite their intended benefits, Economic Impact Payments are not without limitations and criticisms.

• Inflationary Pressure: A primary concern is that a broad distribution of funds can contribute to inflation, especially if the supply of goods and services cannot meet the sudden increase in demand. This can erode the purchasing power of the payment itself and other savings.
• Targeting Inefficiency: Critics argue that EIPs may not be perfectly targeted to those most in need. Some funds may go to individuals who were not significantly impacted by the economic downturn and might save rather than spend the money, thus limiting the direct stimulative effect.
• Debt Accumulation vs. Spending: While intended to stimulate spending, a notable portion of Economic Impact Payments, particularly in later rounds, was used by households to pay down debt or increase savings rather than for immediate consumption.¹⁰ While beneficial for individual balance sheets, this reduces the direct aggregate demand boost.
• Fiscal Cost: The sheer scale of Economic Impact Payments, particularly those enacted during the COVID-19 pandemic, represented a substantial fiscal outlay, contributing to increased national debt. This raises questions about long-term fiscal sustainability.

Economic Impact Payment vs. Tax Refund

While both an Economic Impact Payment and a tax refund involve the government sending money to individuals, their nature and purpose differ significantly.

The key distinction lies in their origin and intent: an Economic Impact Payment is a proactive measure to address an economic crisis, often an advance of a new refundable tax credit, while a tax refund is a reconciliation of an individual's prior year's tax obligations.⁹,⁸

FAQs

Q: Are Economic Impact Payments taxable?

A: No, Economic Impact Payments are generally not considered taxable income and do not need to be repaid. They were structured as an advance of a refundable tax credit.⁷

Q: What if I didn't receive an Economic Impact Payment I was eligible for?

A: If you were eligible for an Economic Impact Payment but did not receive it or received less than the full amount, you may be able to claim it as a Recovery Rebate Credit when you file your federal income tax return for the relevant year.⁶,⁵

Q: How were Economic Impact Payments disbursed?

A: Payments were primarily disbursed via direct deposit to bank accounts, or by mail as a paper check or a prepaid debit card (often referred to as an EIP Card).⁴,³

Q: Did Economic Impact Payments cause inflation?

A: The relationship between Economic Impact Payments and inflation is a complex topic debated by economists. While the payments increased demand, which can contribute to price increases, other factors like supply chain issues and monetary policy also played significant roles.

Q: Who determined the eligibility for Economic Impact Payments?

A: The eligibility criteria and payment amounts were determined by Congress through specific legislation, and the Internal Revenue Service (IRS) was responsible for calculating and distributing the payments based on these rules and taxpayers' most recent income tax return information.²,¹