Tax cut to put $30 billion in America's pocket
Tomorrow's 10 percent cut in federal income taxes will help consumers and some industries, but it won't set off economic fireworks, economists say. This final installment of President Reagan's three-year, 25 percent tax-cut program is expected to save individual taxpayers $30 billion and boost industries such as retail sales, travel, and automobiles. For fiscal year 1984, the entire tax-cut package will save individuals an estimated $89.4 billion, according to the Office of Management and Budget.
The latest installment of the tax cut ''is not an insignificant amount of income,'' notes General Motors Corporation economist David Munro. It's one reason, he points out, the auto industry now expects new-car sales to rise in the second half of 1983 to an annual rate of 9.5 million cars from 8.5 million in the first half.
Sears, Roebuck & Co. economist Thomas Swanstrom says he expects retail sales to run 9 percent higher in the period from July to September than they were in 1982.
''Without the tax cut they would show a 8.5 percent increase,'' he says.
While these effects are welcome, some experts point out why the tax cut isn't likely to result in economic pyrotechnics: The recovery already appears to have plenty of fuel of its own. This was borne out when Mr. Reagan announced Tuesday night that the administration's official economic growth forecast was being raised from 4.7 percent to 5.5 percent for 1983.
''Practically speaking, (the final tax cut) is not terribly significant in terms of momentum in the economy,'' argues Robert Gough, senior vice-president at Data Resources Inc., a forecasting firm. Consumers have already cut their debts, renewed their confidence, and speeded up spending, he notes.
''The tax cut sort of pales beside the normal cyclical rebound,'' adds Thomas Thomson, senior vice-president and chief economist at Crocker National Bank.
Aside from the fact that consumers have already started adjusting their spending habits in anticipation of the cut, the final installment's effects are likely to be diluted, because citizens are being hit by higher state and local taxes. These could force many taxpayers to curb their spending plans.
Some economists add that the tax reduction may in fact weaken the rebound slightly, because the tax cut has forced the federal government to borrow an extra $30 billion to cover revenue lost to the cut. Some economists say that as a result the cut has contributed to the recent increase in interest rates.
On the other hand, the tax cut is expected to boost the savings rate, at least temporarily. This would exert some downward pressure on interest rates.
''There has never been a tax cut in which the initial reaction of consumers was not to save at a higher rate,'' while they adjust to the change in income, explains Sandra Shaber, senior economist at Chase Econometrics, another forecasting firm. Chase expects the individual savings rate to jump 1 point in the next three months from its current 5.3 percent level.
While personal income tax rates are being cut 10 percent, changes in the withholding rate vary by income group.
The withholding rates for individuals earning $5,000 or less and couples making $10,000 or less won't change at all. These groups received more than the average 5 percent reduction in October 1981, and more than the average 10 percent cut in July 1982, according to Internal Revenue Service spokesman Wilson Fadely. Thus they have already received the bulk of the total 25 percent tax cut.
''Any small reductions would range in pennies and could not be reflected in the withholding tables,'' he says.
Taxpayers making $36,000 or more and couples making $50,000 or more will also see reductions in their withholding of less than 10 percent. Individuals in these brackets often have income not subject to withholding. So they would be underwithheld if their withholding was reduced by 10 percent. In addition, some of these individuals are taxed at the maximum 50 percent rate. Since the maximum withholding rate is 37 percent, adjusting their withholding for the tax cut could also leave them underwithheld, Mr. Fadely notes.
While federal taxes are dropping, state and local taxes are rising. A study by the respected National Journal magazine found that 45 states have raised taxes between 1981 and 1983. In most cases the state and local increases have not overwhelmed federal savings.
''In a great many areas of the country there has been an effective reduction in the tax burden for most taxpayers,'' says DRI economist Gough.
The shift in the tax burden to the state level, however, overall is taking a larger proportional bite out of the paychecks of low-income individuals than from those earning higher income.
''It is generally accepted that sales and excise taxes are regressive,'' notes Elsie Watters, director of research for the Tax Foundation. ''And we have seen more sales tax increases in states than income tax increases by a long way.'' The fastest-rising tax across the country is the property tax, which rose about 14 percent last year.
Data on total tax savings seem to bear that out. State tax hikes consumed a smaller portion of federal tax cuts for a hypothetical family with a $50,000 annual income than for similar families earning $25,000 or $15,000, according to the National Journal. After state tax hikes are subtracted from federal tax cuts between 1981 and 1983, the $50,000-a-year family is ahead by $1,200, the middle-income family by $600, and the lower-income family by $150.