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Economic stimulus proposals may miss target

Incentives being considered will have little impact in the next few months, when help is needed. And some could cause problems down the road.

©Los Angeles Times

© St. Petersburg Times,
published October 21, 2001

WASHINGTON -- President Bush and Congress, in their zeal to avert a deep recession, are getting ready to approve billions of dollars in new tax breaks. But economists say there's a hitch: Most of the leading proposals won't do much to help the economy, at least not when it needs help the most.

While most people are just getting used to the idea of a recession, many economists are convinced the foundation has been laid for a recovery beginning in the first half of 2002. To have the maximum stimulative effect, they say, new tax cuts or spending programs need to kick in before then.

Few of the tax proposals under consideration pass that test. And those that might make the deadline have other flaws that could limit their effectiveness.

"As a practical matter, there isn't a whole heck of a lot that the government can do today that's going to affect the economy in the next three or four months," said Bruce Bartlett, an economist at the National Center for Policy Analysis.

Besides being questionable tools for revving up the economy in the short run, some tax cuts could cause problems over the long haul because they would permanently reduce government revenues, worsening the budget outlook and potentially driving up interest rates.

But those concerns are not likely to slow the legislative locomotive that is pulling big-ticket tax cuts in the name of economic stimulus, congressional insiders say. The reason: Reviving the economy may be the stated objective, but other political agendas are at work.

The White House and many congressional Republicans fear that upper-income tax rate reductions scheduled to take effect in 2004 and 2006 might be rescinded if the federal budget outlook continues to deteriorate. By locking them in now, they say, it would be much more difficult for Democrats to take them back later.

At the same time, corporate lobbyists and their GOP allies were chagrined that the big tax cut package enacted earlier this year lacked anything for business. They see the stimulus package now taking shape as perhaps their only chance to catch up.

"They're hitchhiking on the stimulus package to get permanent changes that don't have anything to do with stimulus," Brookings Institution economist Peter R. Orszag said. "From the narrow perspective of just trying to stimulate the economy, it doesn't make any sense."

That assessment was essentially confirmed by Douglas Holtz-Eakin, chief staff economist for President Bush's Council of Economic Advisers. He said at a Cato Institute forum that Bush's tax proposals should be regarded "not as fiscal stimulus ... but rather as insurance."

President Bush has called on Congress to pass an economic stimulus package of as much as $75-billion, of which $60-billion would be earmarked for tax reductions. But the dollar amount has already begun to escalate as tax and budget experts analyze the specific proposals under consideration.

While dozens of purported stimulus proposals have been floated by members of both parties since the Sept. 11 terrorist attacks, only a handful appear to be acceptable both to the White House and to congressional tax-writers. The current short list includes:

Making previously approved income tax reductions take effect on Jan. 1, 2002, instead of in 2004 and 2006.

Sending $300 checks to low-income wage-earners who were left out of the previous round of tax rebates.

Giving businesses a bigger first-year depreciation deduction for new equipment purchases.

Repealing the alternative minimum tax paid by corporations that otherwise would owe no taxes.

Allowing money-losing businesses to recover more of the taxes they paid in previous years.

Each proposal has at least a few supporters who contend it would help revive the economy if enacted quickly. And some might be good long-term policy changes even if their short-term stimulus value is marginal.

But in the view of many economists, conservatives as well as liberals, most appear to fall short of the key criteria for stimulus proposals: They should take effect quickly, promote new spending or investment that otherwise would not occur, and do no long-term damage.

The accelerated income tax rate cuts, for example, could cost as much as $122-million over the next three years. The reductions would not take effect until Jan. 1, 2002, when payroll withholding rates would be lowered. Only 25 percent of the eventual tax savings would come during the first year; the rest would show up long after the economy's expected rebound. The cuts would apply only to the 25 percent of taxpayers at the top end of the income scale, and research indicates that affluent households are less likely to spend tax reductions than lower-income wage-earners.

"That's a terrible idea," said Alan S. Blinder, a Princeton University economist and former vice chairman of the Federal Reserve. "Any package that has less than 80 percent of its stimulus in the first year should be rejected, no matter what else is in it," Blinder said. "My guess is that if you haven't been able to hit the economy hard with stimulus by the first quarter of next year, you're too late."

The proposal that comes closest to passing the short-term test is a one-time round of rebates for the 30-million low-income households that paid Social Security and Medicare payroll taxes last year but had no income tax liability. The rebate plan, which would put $14-billion or so in workers' pockets, would be particularly effective if the checks went out before the holiday shopping season, economists say. And low-income workers who live from paycheck to paycheck are more likely to spend the extra cash than to save it.

But even that plan has potential flaws. Congress is expected to spend several weeks before enacting a final package, and it's unclear whether the Treasury can get the the presses moving quick enough to send out checks before Christmas. In addition, it appears that taxpayers who received the first round of rebates this fall spent only about 20 cents on the dollar. The response could be even lower this time if the terrorist attacks frightened consumers.

"We're facing a peculiar set of circumstances in which none of the proposals is likely to be highly effective," said Robert D. Reischauer, president of the Urban Institute. "We have consumers who by and large are not spending because they are insecure, not because they lack the resources. Putting money in their pockets might not result in large increases in consumer demand."

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