Jan. 14 (Bloomberg) -- President George W. Bush and Treasury Secretary Henry Paulson face a choice: Deliver an economic stimulus plan that has a chance of passing Congress, or stick to their ideological guns, risk doing nothing and possibly pay a price in the 2008 elections.

A one-time tax rebate, which might give every U.S. household an extra $500 to spend by midyear, may be the only measure with immediate impact that both the Republican president and Democratic Congress can agree on. While neither side thinks the rebate by itself goes far enough, differences over what else to do threaten to create a stalemate.

Administration officials, trying to avoid the second recession of Bush's presidency, are talking about coupling the rebate proposal to business-investment incentives and an extension of tax cuts due to expire in 2010. Democrats will likely oppose those plans; they are considering adding public- works spending Bush might not accept.

``The question is whether they can get beyond ideology and decide what has the best bang for the buck in terms of stimulating the economy,'' says Bob Greenstein, executive director of the Center on Budget and Policy Priorities, a Washington group that is usually aligned with Democrats. Otherwise, ``there is the potential for political differences to kill any package at all.''

Tax rebates are a tool Bush has used before, with some success, to kick-start the economy. Rebates of as much as $600 per household were part of the package that economists credited with boosting consumer spending during the 2001 recession and helping start an expansion within months.

Dooming a Deal

The difference this time is that add-ons would probably doom a deal. What's needed is ``a clean focus on this issue,'' former Treasury Secretary Robert Rubin said after moderating a panel on the topic in Washington Jan. 10. To get a deal, Bush and Congress will need to ``keep all the other agendas out of this thing,'' said Rubin, now the chairman of Citigroup Inc.'s executive committee.

For Republicans, the situation evokes memories of Bush's father, President George H. W. Bush. To restart growth after the 1991-1992 economic slump, the elder Bush proposed a capital- gains cut and business-investment incentives; Democrats countered with a plan for a tax refund for moderate and low- income workers and increases for wealthier taxpayers.

The president's veto of the Democrats' plan resulted in no stimulus package at all. ``That can easily happen again,'' says Pete Davis, a former economist for the congressional Joint Committee on Taxation who advises investors on politics as head of Davis Capital Investment Ideas in Washington.

Losing the White House

Republicans, who are trying to hold on to the White House in the 2008 presidential election, well remember the outcome in 1992: Bush, running for re-election, lost to Democrat Bill Clinton.

This time, economists from both sides of the political fence are making the case for stimulus, with unemployment at a two-year high of 5 percent and economic growth forecast to slow this quarter to as little as 1.1 percent.

A one-time tax cut amounting to about $70 billion and distributed in the second quarter would boost the level of economic growth by about 0.5 percent during both the second and third quarters, according to a paper published last week by Douglas Elmendorf, a former Federal Reserve Board official and now senior fellow at the Brookings Institution in Washington.

One-Time Payment

Harvard University professor and former Treasury Secretary Lawrence Summers, a Democrat, suggests a package of as much as $75 billion, including one-time payments to all taxpayers.

Republican Martin Feldstein, a Harvard professor who chaired President Ronald Reagan's Council of Economic Advisers, proposes a stimulus plan that would kick in if economic data provide ``clear evidence'' of a recession. Feldstein, head of the National Bureau of Economic Research and a member of the committee that dates U.S. economic cycles, says a recession is more likely than not.

In addition to a tax rebate of between $300 and $500, Democrats are considering restoring a $1,000 tax credit for lower-income families and adding spending on infrastructure such as roads and bridges. ``Bush would certainly object to those proposals,'' even if it means no stimulus bill passes, says Davis.

Democrats will likely propose legislation before Bush announces details of his proposal in his State of the Union address Jan. 28. House Speaker Nancy Pelosi of California and Senate Majority Leader Harry Reid of Nevada, in a letter last week, sought a meeting with Bush to discuss stimulus plans.

The Clinton Plan

Senator Hillary Clinton of New York, now in the midst of a battle for the Democratic presidential nomination, last week unveiled a $70 billion stimulus program that includes help for homeowners in danger of foreclosure and other aid to low- and middle-income families. The plan would add $40 billion in tax rebates if the economy worsens.

Bush, trying to keep his presidency from being the first since Richard Nixon's to experience two recessions, says the best way to keep the 74-month expansion alive is to extend tax cuts enacted during his first term.

`We should look at the lessons of recent history,'' John Snow, Treasury secretary from 2003 to 2006, said in a Jan. 9 interview. ``Those 2001-2003 tax cuts were well-timed and helped create lift.''

Strong Opposition

The measures, most of them due to expire by the end of 2010, include some that Democrats might find acceptable: expanded child credits and elimination of the tax advantage enjoyed by two single taxpayers over a married couple -- the so- called marriage tax. Others, such as abolishing the estate tax and lowering rates on capital gains and dividends, will run into strong opposition from Democrats, who took control of Congress after the 2006 elections.

``It's a very heavy lift to get them to make that tax relief permanent,'' Paulson told reporters Jan. 7.

The plan the White House puts forth is nonetheless likely to include such an extension, says William Beach, a tax analyst at the Heritage Foundation in Washington who has advised administration officials on how a stimulus should be structured.

Beach says a tax rebate and a business-investment incentive, perhaps one that allows companies to immediately deduct much of the cost of new capital equipment, will be part of any Bush stimulus plan.

Paulson said Jan. 11 that any measures to jumpstart growth should be put into effect swiftly. ``We are looking at things that could be done quickly,'' he told Bloomberg Television's ``Political Capital with Al Hunt'' in Washington. ``Time is of the essence.''

Compromising Principles?

Meanwhile, some in Bush's party argue that the president is compromising his principles even by considering a one-time rebate.

``I am not aware of any time that rebates, just dropping money out of airplanes, have done any good,'' says Senator Jon Kyl of Arizona, the No. 2 Senate Republican and a member of the tax-writing Finance Committee. ``There's really almost nothing that would make an impact except tax policy, which probably wouldn't pass in a Democratic-controlled Congress.''

Republicans argue that the 2001 rebate owed much of its effectiveness to the fact it was accompanied by tax cuts that were hardly temporary, lasting through the end of the decade. Knowing that more tax relief was on the way encouraged Americans to spend most of the cash, about $38 billion, within months, they say.

Consumer Spending

That helped to lift consumer spending by 2.9 percent and 2 percent in the third and fourth quarters of 2001, according to a 2004 paper by economist David Johnson of the Bureau of Labor Statistics and other authors.

A one-time rebate wouldn't have the same result, says Ryan Ellis, tax-policy director at the Washington-based Americans for Tax Reform, a group that supports lower taxes and eliminating most deductions in favor of a flat rate.

``When people get a one-time cash flow, their first instinct is to save it,'' Ellis says.

If Bush and Congress are to act at all, they will have to move quickly to have any impact, says Alan Auerbach, an economics professor at the University of California, Berkeley, who has done research on the effects of fiscal stimulus.

``Timing is extremely important,'' he says. ``Recessions typically last less than a year, so unless you can be pretty quick, it's not worth doing.''

To contact the reporter on this story: Matthew Benjamin in Washington at mbenjamin2@bloomberg.net.

Last Updated: January 13, 2008 19:38 EST