Bush team forges tax-cut strategy

When it comes to the economy, the Bush administration is finding it harder to change the numbers than the faces.

This week President Bush added fresh talent to his economic team, naming a new Treasury secretary and a new chairman of the Securities and Exchange Commission. A new head of the National Economic Council was expected to be announced Thursday.

Now, the focus is on moving both polling numbers and economic indicators. The White House is developing new tax proposals aimed at boosting lackluster economic growth, hoping in the process to improve the way voters view Mr. Bush's economic stewardship.

While those goals are short-term ones - with an eye on the current economic cycle and the next election cycle - leaked details show a tax plan that could permanently lighten the burden on businesses and investors.

The plan is drawing mixed reviews, both for its approach to the current situation and for the broader economic philosophy that underpins it.

"The plan as leaked has the right components," says Martin Regalia, chief economist at the US Chamber of Commerce. "Now we will just have to see how they are able to build those variable components into a package of a fixed size."

If you want to stimulate economic activity, "the four things the administration has proposed are the worst possible ways to do it," counters Richard Kogan, senior fellow at the Center on Budget and Policy Priorities, a think tank focused on the needs of low- and middle-income Americans.

The outlines of the tax proposals, first reported in the Wall Street Journal, could cost up to $300 billion over 10 years and are said to include:

• Moving up to 2003 a reduction in tax rates for middle and upper income individuals now scheduled to take effect in 2004.

• Reducing the taxes on corporate dividends, either for individuals, companies, or both.

• Offering businesses more generous tax deductions for the costs of factories and equipment.

• Expanding the tax breaks offered by retirement plans such as individual retirement accounts (IRA's) and 401(k) plans.

The White House is officially staying mum about the tax package it has under development. Spokesman Ari Fleischer said, "The president is reviewing a number of items and I'm just not going to prejudge any determinations the president may make."

The new economic proposals address a presidential political vulnerability which exists despite a high overall approval ratings for Mr. Bush. A new nationwide Christian Science Monitor/TIPP Poll, conducted December 2 to 8, showed 61 percent of Americans approved of his handling of the presidency. The poll has a margin of error of plus or minus 3.3 percentage points.

But of the 900 respondents to the telephone poll, 28 percent gave Bush poor or failing grades on handling the economy. A new Wall Street Journal poll had even tougher news: 45 percent of those polled disapproved of the president's handling of the economy.

Voters are clearly worried about pocketbook issues with 32 percent of those surveyed by the Monitor saying they expect economic conditions to get worse over the next six months.

Whether it is the most effective method way of dealing with the nation's economic woes, tax cutting is popular. Some 49 percent of those surveyed by the Monitor said they pay too much federal income tax. One-third want last year's tax cuts to take effect immediately rather than be phased in as last year's tax law provides.

A KEY issue is whether further tax reductions are the most effective remedy for the problems the economy faces.

According to government data on US economic output, "in terms of what we can have an influence on, the biggest weakness relates to capital spending - spending by business on equipment and structures," notes Nariman Behravesh, chief economist with Global Insight Inc.

Business investment has been slumping for two years, holding down overall economic growth.

"Anything that will help boost [business spending] is a priority," says Behravesh. Of the president's proposals, the one with the greatest potential impact on business spending would be changes in the rules under which firms can write off their investments.

"Our biggest problem is weak corporate investment," agrees Augustine Faucher, an economist at Economy.com.

To help prop up the consumer sector until business spending rebounds, Faucher favors "things that get money into people's hands now." Among provisions that would accomplish this, he says, are "advancing the income tax cuts from 2004 to 2003." A temporary holiday in Social Security tax payments discussed by some Democrats "would be even more effective," in spurring consumer spending, he says.

While Chamber of Commerce economist Regalia favors measures to improve business depreciation allowance, he stresses the importance of steps, like reducing income-tax rates, that he says would put extra cash in the hands of consumers. What businesspeople "want right now for Christmas is a customer."

Not everyone agrees with the Chamber's Regalia that the Bush tax plan, to the extent its outlines are known, is the right one.

Economist Kogan sees severe problems with Bush plan as it is taking shape. The rate cuts benefit those with the highest incomes, and thus the greatest tendency to save. As a result, such cuts have only modest stimulative impact, he says. He faults plans to offer additional incentives for business investment since, he says, business already has excess capacity.

A better course, in his view, is "another round of rebates and extending the rebates to those who didn't get them the last time - 51 million people .... who didn't pay federal income taxes but do pay payroll and excise taxes."

The White House is not alone in working on an economic stimulus package. House Democrats held an economic summit this week but did not decide on an economic package for 2003.