Tax-cut focus shifts to faster relief

Suddenly, sub-stantial tax relief for this year is in vogue in Washington.

After months of debating a mammoth tax-cut plan that would largely take effect later this decade, official Washington is moving toward putting more money in the hands of Americans this year in hopes of stimulating the torpid economy.

On Capitol Hill, many Republicans and Democrats now agree that a short-term stimulus is needed - though they differ on the best approach. And in a shift, President Bush is supporting the idea of a large, immediate tax cut as well.

To be sure, the president hasn't backed off his desire for a $1.6 trillion cut over 10 years. But the White House now seems to acknowledge that the economic ground has shifted since Mr. Bush first devised his tax-cut package during the campaign - and that a jolt from government is needed now.

"What you see here is finally President Bush is moving from campaigning to governing," says Stan Collender, a budget expert at Fleishman-Hillard Inc. here. "Before, he was sticking to his [tax plan] as a mantra, regardless of the situation."

Indeed, the pressure has been building for weeks for the president to take action. So far, the economy has responded little to Federal Reserve Chairman Alan Greenspan's attempts at resuscitation. Last week, when the Fed lowered interest rates for the third time this year, stock markets plummeted. Consumer confidence, despite a jump in March, also remains worrisome.

At the same time, the warm feelings that the public often harbors toward a new president are starting to wear off. A new Washington Post-ABC News poll shows the president's negative ratings markedly increasing since last month - up 10 percentage points, though his overall job approval climbed slightly to 58 percent.

Still, even though a consensus is emerging in Washington that a fiscal stimulus is needed, economists point out that the government's ability to revive the economy quickly may be limited.

True, Bill Clinton helped rejuvenate the economy eight years ago by lowering the federal deficit. Sixty years before that, Franklin Roosevelt helped pull the nation out of the Great Depression with a massive government jobs program.

But today's economic conditions are different. Unemployment stands at a respectable 4 percent, and the government is running a surplus not a deficit.

Moreover, one of the tools the government has traditionally used to try to stimulate the economy - more government spending - now seems politically untenable. That leaves a tax cut as Bush's main option.

"That's really the lever the administration has," says Cynthia Latta, an economist at Standard & Poor's DRI. "So how powerful that lever is, depends on what he [Bush] does with the tax cut."

Dueling plans

And therein lies the great debate swirling in Washington now.

Republicans and Democrats agree that with the country experiencing an "economic downturn," as the administration now calls it, Washington needs to act quickly to stimulate economic growth. But that is about all they agree on.

Yesterday, Senate Democrats unveiled their plan for a one-time $60 billion rebate for all Americans this year - which would amount to $300 per individual taxpayer. They want to pass this cut immediately, and not have it bogged down by debate over an entire package of tax legislation. They also are proposing an immediate cut in the 15 percent income-tax rate for low-income taxpayers, creating a new 10 percent bracket.

Emphasizing the need to create more-immediate tax relief, the administration now says it can make room for the cost of a tax cut this year, possibly by delaying its plan to repeal estate taxes - possibly for two years. But it insists that whatever Congress decides to do this year, it must be part of the president's overall package that reduces taxes across the board.

A one-time rebate will do little good if taxpayers don't have the security of knowing that more is on the way, the White House argues. Under the terms that the Democrats suggest, consumers would be more likely to save their $300, rather than spend it - which is what the economy needs, the administration maintains.

Meanwhile, some Republicans in Congress want to go further than the president's proposal by cutting the capital-gains tax, a move they maintain would help spur business investment.

Philosophical differences

These approaches all find their roots in the various conflicting interpretations of what has caused the downturn - and what is the best way to gas it up again.

Many Democrats believe government can best help the economy by targeting tax relief toward middle- and low-income consumers, the drivers of spending in the economy. They reject the Bush plan, in part because the across-the-board cuts give most of the tax benefits to the wealthy.

On the other hand, many Republicans believe it's businesses and investors who need relief - the people whose investments lead to the output of goods and services.

"Rebates are the worst kind of tax policy, and they will have no impact on the economy," says Dan Mitchell, an economist at the conservative Heritage Foundation here. What's needed, he says, is a large cut in capital-gains taxes to stimulate business investment. "Consumer spending is not the cause, it's the result. In order for the economy to grow faster, you have to produce more."

French Caldwell, who follows the high-tech industry for the Gartner Group consulting firm, agrees with this assessment. His research shows that "demand is still there." The slump, he says, "has really been led by decisions at various companies to cut back on capital spending. It's a capital-led downturn, not a consumer-led downturn."

But Latta, at DRI, maintains the economy has larger problems to work out - problems like overinflated stock prices, high inventories, and excess capacity.

"These are just things the economy has to get through," she says. Of course, tax cuts and interest-rate cuts will help, but there are some things, she maintains, that the country just needs to wait out.

(c) Copyright 2001. The Christian Science Monitor