Assessing the form, impact, of looming tax package

Sometime next month, the new Bush economic team will propose another tax cut, probably labeled a "stimulus package."

It will be sailing under false colors, says Richard Kogan, an economist at the Center on Budget and Policy Priorities. Tax cuts discussed by the Bush administration won't give much of a boost to the sluggish economy in 2003, he says.

Rather, the tax package will aim its benefits primarily at corporations and stockholders, Mr. Kogan says. "The distributional aspect will be highly regressive" - that is, helping the well-off more than the poor or the middle class.

It's the administration's view that the well-off are "overtaxed," says Kogan.

Charles Schultze, who was former President Carter's top economic adviser, also has doubts about the advertised goal of the next Bush tax cut. "In the short-term, it will not much help the economy," he says.

At this point, details of a tax package have not been announced, and probably have not been even fully decided.

Washington leaks suggest it could include: advancing middle- and upper- income tax cuts in the 2001 tax-cut bill from 2004 to 2003; reducing the tax on corporate dividends to the lower capital- gains rate (usually 20 percent) from the personal income tax rate - or eliminating that tax altogether; accelerating depreciation and other breaks for business; allowing a larger write-off of personal investment losses against regular income than the present limit of $3,000 per year; giving retirement savings a bigger tax holiday; and letting those who don't itemize tax deductions deduct their charitable gifts against income in any case. The White House may propose an increase in child tax credits to push benefits down the income ladder.

The talk is of $300 billion in total tax goodies over 10 years.

Most of that - perhaps $200 billion - will be scheduled early to give the $10.5 trillion economy a real shove, guesses Stan Collender, a budget expert with Fleishman-Hillard Inc., in Washington. Any lesser sum would be like a rabbit leaning on a huge draft horse.

And there is a matter of timing. With Republicans now in control of the Senate, the House, and the presidency, the White House may hope to get a filibuster-proof, budget-reconciliation resolution that includes its tax bill through Congress in record time - say before Easter.

But by April of next year, the economy may have picked up more steam.

"Chances are at least 50-50 we won't need [economic stimulus]," says Mr. Schultze, now at Brookings Institution.

Even if passed in the spring, most of the above tax measures would take time to boost the economy. Conservative economists count on a psychological lift raising stock prices and prompting individuals and business to spend quickly.

But, Kogan complains, most of the tax measures are "supply-side" oriented - that is, designed to stimulate business and investment and encourage greater individual effort to enhance growth in the long run, rather than "demand-side" measures that will encourage more spending right away.

In a slow economy, there already is excess business capacity. What is needed is more demand for goods and services to step up business activity, he maintains.

Democrats are certain to hammer on this issue. Former President Bill Clinton called for freezing future tax cuts in the 2001 bill for those earning more than $400,000 per year. Sen. John Kerry (D), of Massachusetts, perhaps a presidential contender, suggests temporarily exempting workers from the 7.65 percent payroll tax on the first $10,000 of income.

But Mr. Collender doubts the White House will go along on any Social Security payroll tax cut. Lower-income taxpayers "are not their voters," he says.

One "mission impossible" for the new economic team will be keeping the federal deficit from ballooning. This year's deficit shows signs of reaching $200 billion. With a tax cut, it could reach $400 billion, or almost 4 percent of gross domestic product, the nation's total output of goods and services. That's moving toward the 6 percent record peacetime level under President Reagan.

Outlays grew 8 percent in fiscal 2002. The White House will have difficulty finding places to cut spending this fiscal year to offset growing outlays in defense and security.

War in Iraq would worsen the fiscal scene.

A new study by the Congressional Budget Office for Sen. George Voinovich (R) of Ohio calculates that federal discretionary spending (which excludes entitlement outlays, such as Medicaid or welfare) would have to decline by about 8 percent a year in order to reach budget balance in 2007. Budget cuts to do that are not likely.

Without change, the deficit could reach nearly $530 billion by 2012.

Donald Straszheim, a Santa Monica, Calif., economic consultant, objects to a tax cut because it makes tax simplification and other long-term reforms unlikely. Such reforms would be broader, allowing Congress to give everyone a tax cut in the process, some small, some big.