Thursday, May 29, 2003

Tax-cut cash is on the way

By James McNair
The Cincinnati Enquirer

Rebates will be mailed, paychecks will be fatter and, if President Bush is on the mark, the U.S. economy will kick into gear.

Bush ended months of debate Wednesday by signing into law a $350 billion tax-cut package that lowers tax rates, encourages business investment and tosses a cash windfall of up to $400 per dependent child this summer to 25 million American families.

Beginning in July, paychecks will be a bit fatter as employers reduce withholding to reflect lower tax rates.

Some other breaks, such as the reduction of tax rates on dividends and a reduction in the "marriage penalty," won't pay off until taxpayers file their 2003 returns.

The tax cuts, less than half the $726 billion that the administration originally sought, are the president's medicine for a sputtering economy that has lost more than 2 million jobs since Bush took office. The law also calls for $20 billion in state aid, of which Ohio will receive $770 million; Kentucky, $291 million and Indiana, $370 million.

"Today, we are taking essential action to strengthen the American economy," Bush said as he signed the bill into law Wednesday. "This legislation is adding fuel to an economic recovery."

The economy can use the help.

Handcuffed by the war with Iraq, the threat of terrorism and low consumer confidence, the nation's gross domestic product grew at an annual rate of 1.6 percent in the first three months of 2003, down from 2.4 percent for all of last year. The nation's unemployment rate rose to an eight-year high of 6 percent in April. Federal Reserve Chairman Alan Greenspan worries that inflation could be replaced by deflation.

Bush wants to stimulate the economy by taking less money out of people's wallets, just as he tried with a $1.35 trillion tax cut in 2001. The new tax law increases the child tax credit to $1,000 from $600 a child and calls for the $400 difference to be paid this summer to families that qualified for the credit in 2002.

Greater Cincinnati residents weren't entirely familiar with the provisions of the tax law, but welcomed the lower withholding.

"For me, with a family of three kids and a middle-class living, it helps me tremendously," said Todd Engle of Burlington. "It will help for the kids' college education."

"I'll spend it on the kids, buying things that they need," said Mary Chandler of Cincinnati.

The law lowers the highest income tax rate to 35 percent from 38.6 percent and makes more people eligible for the minimum 10 percent rate. It lessens the so-called "marriage penalty" by expanding the 15 percent tax bracket and raising standard deductions for married couples. Earnings from corporate dividends will be taxed at no more than 15 percent, down from the former maximum of 38.6 percent. Taxes on capital gains will likewise top out at 15 percent.

The cuts aren't permanent. Many of the tax cuts on regular income, for example, will expire in 2005.

Democrats - and some Republicans - argue that the $350 billion transfer of wealth comes at too high a cost. The federal deficit, they argue, is expected to top $300 billion this year, hardly the time to reduce revenue, particularly in the form of dividend tax cuts that mainly benefit the well-to-do.

"Large tax breaks for a privileged few, massive deficits and massive debt don't make the pie expand - they make it shrink," said New Jersey Sen. Jon Corzine, a Democrat.

Economists, investment bankers and researchers also have divergent opinions on the tax package.

William Dudley, chief economist at Goldman Sachs & Co., said its effects will be "blunted a bit because the tax bill is tilted very sharply to high-income households." The top economist at Lehman Brothers echoed that view.

But Robert Doll, president of Merrill Lynch Investment Managers, said he expects the tax cuts to lift the economy as well as the stock market. The Heritage Foundation, a conservative policy research firm, expects the cuts to help produce 850,000 jobs and $73 billion in additional output in 2004.

Deborah Tweddell of Lakeside Park criticized the tax cuts even though she stands to benefit from child credits and lower tax rates.

"When we're running a large budget deficit, I don't think a tax benefit that will really only benefit such a small percentage of our population is really going to have an impact on the deficit," she said. "We are attempting to balance the deficit on the backs on the disabled, elderly and sick."

Harry Bedanes, managing partner of the Cincinnati accounting firm J.D. Cloud & Associates, agreed that the benefits tilt toward the wealthy. But this summer's child credit rebates, he said, will trickle into the economy from all income classes.

"Ordinarily, that would come into your tax calculation when you file your return," Bedanes said. "It's going to get money into the hands of people who are going to spend it."

The new law allows businesses to write off $100,000 on new equipment purchases, up from $25,000, and accelerate the depreciation of their equipment.

Delta Air Lines spokesman John Kennedy said the Atlanta-based airline hopes that the tax cuts will lead to more business and personal travel. Milacron Inc. and Metalworking Group, a Colerain Township metals shop, said they had no immediate plans to cash in on the equipment-purchase incentives.

Jody Askin, sales manager for Kerry Jeep-Chrysler in Milford, said the rebates and bigger take-home pay could trigger a spike in auto sales, as it usually does at tax refund time.

Mike Cull, owner of the Dubliner restaurant in Pleasant Ridge, said he doesn't expect people to begin splurging on corned beef-and-cabbage dinners.

"During poor economic times, people will tend to cut things back," Cull said. "I'm fortunate enough to have a bar. People still go there."

Staff writers Ken Alltucker, James Pilcher, Mike Boyer and Laura Baverman and Enquirer wire services contributed to this report.


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