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Bush Sends $1.6-Trillion Tax Cut Plan to Congress

Policy: President offers his package as the cure for an economic slowdown. Critics question whether rate relief can act quickly enough to halt a slide. Supporters say it will boost confidence.

February 09, 2001|JAMES GERSTENZANG and WALTER HAMILTON | TIMES STAFF WRITERS

WASHINGTON — President Bush on Thursday sent Congress a $1.6-trillion tax cut proposal, crafted during the election campaign when the economy was booming but serving now as his remedy for the sudden economic slowdown.

"A warning light is flashing on the dashboard of our economy, and we just can't drive on and hope for the best," Bush said at a Rose Garden ceremony.

"We need tax relief now. In fact, we need tax relief yesterday."

But some analysts challenged whether any tax cut could be put in place fast enough to turn the economy around. And the economic effect also hinges on whether taxpayers actually spend the tax cut. Taxpayers are already giving mixed signals, with some saying in interviews they would spend their tax cut even before they got it and others saying they would save it.

During the campaign, Bush defended his tax package as necessary relief for those struggling to enter the middle class. Now, with the economy growing much more slowly, he is promoting essentially the same package but wrapping it in different language.

Bush's key provision would reduce individual tax rates from the current range of 15% to 39.6% to new rates ranging from 10% to 33%. When the new rates would take full effect in 2006, married couples would pay 10% on their first $12,000 of taxable income and 33% on all income over $166,500.

This year, the White House estimates, the average family of four would enjoy a tax cut of $640, or about $12 a week. That would grow to $1,600, or about $30 a week, in 2006, when the phased-in tax cut would take full effect.

Some tax experts said that, regardless of its size, no tax cut can be implemented fast enough to help an economy on the way down. More than that, critics said, the tax cuts are not targeted to the lower and middle-income people who would be most likely to spend their tax savings and thus boost economic activity immediately.

"To fight a recession, you want a plan that is immediate, moderately sized and geared to low- and middle-income people," said Bill Gale, a senior fellow at the centrist Brookings Institution think tank in Washington. "Bush's plan is exactly the opposite."

Supporters pointed to the plan's psychological effect: its potential to boost consumer and investor confidence immediately, even before anyone has an extra dime in hand.

"It will have a big short-term impact and an even bigger long-term impact," said Dan Mitchell, a tax specialist at the conservative Heritage Foundation.

Lawrence B. Lindsey, the president's economic advisor, declined to explain the tax cut's economic rationale. Asked to provide one at a White House briefing, Lindsey said: "I might refer you to your economics textbook from freshman year for the answer."

Bush is counting on people like Heather Wieshlow of Laguna Niguel, Calif. The 35-year-old owner of a career-consulting firm who earned $46,000 last year said that, even if her taxes were cut by $100 in the first year, she would spend that money as soon as Congress approved the tax cut.

"I'd think it's time to go shopping and buy something decadent, and then go to dinner," she said.

But not everyone is as obliging as Wieshlow. Taxpayers like Terry Loop are Bush's toughest audience.

The Los Angeles computer consultant, 58, who earned $125,000 last year, figures that Bush's plan would trim his tax bill by only a few hundred dollars a year--a relative pittance that Loop says he would save rather than spend.

"It's not a lot," Loop said. "It's what I make in a day."

Despite differences over the plan's economic effect, Congress is arguing not over whether taxes should be cut but rather by how much. Also in play is whether the cuts should go entirely to individuals, as Bush is arguing, or to businesses as well.

The president's plan--a set of general guidelines as opposed to specific legislative language--was delivered at a Capitol Hill news conference by Treasury Secretary Paul H. O'Neill. In addition to the income tax rate cuts, it would:

* Double the child tax credit to $1,000 for families with annual incomes up to $200,000, compared with today's $110,000 ceiling.

* Reduce the marriage penalty by allowing two-earner families to deduct 10% of the lower earner's income.

* Eliminate the estate tax, which is applied to estates of $675,000 and greater.

* Allow people who claim the standard deduction to also deduct charitable contributions from their taxable income.

Republicans, who had helplessly watched President Clinton veto their previous efforts to cut taxes, were gleeful.

"Finally," said House Speaker J. Dennis Hastert of Illinois, "we have a person at the other end of Pennsylvania Avenue that will sign the bill." Senate Majority Leader Trent Lott of Mississippi pledged Thursday that "tax relief is on the way."

Democratic leaders, now on the defensive, argued that Bush's plan is too large and too heavily skewed toward the wealthy.

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