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Bush Sends $1.6-Trillion Tax Cut Plan to Congress

TIMES STAFF WRITERS

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.”

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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.

They fear that projections of the federal budget surplus--$5.6 trillion over 10 years--could be wildly overestimated and that the tax plan’s fiscal drain could be underestimated. If so, the tax cut might leave none of the surplus to shore up Medicare and Social Security and pay down the national debt.

The Center on Budget and Policy Priorities, a liberal research organization, said that the estimated $1.6-trillion cost of the tax plan over its first 10 years could turn out to be $2.1 trillion when, among other calculations, higher federal interest costs generated by the tax cut are added.

Sen. Olympia J. Snowe (R-Maine) and a bipartisan group of centrists have urged that the measure include a provision to block or slow implementation if surplus estimates fall below current projections.

William Niskanen, chairman of the Cato Institute, a libertarian think tank in Washington, observed that Bush’s tax cut resembles, in design but not in rationale, the plan he campaigned on. He cautioned that the interest rate cuts approved last month by the Federal Reserve would be more effective than any tax cut at stimulating a sagging economy.

An interest rate cut, he said, “gets into the economy much more quickly than anything Congress can do. But the political problem is that politicians feel compelled to be doing something when a problem develops.”

At its current magnitude, however, the tax cut is rated by many economists as unlikely to change people’s spending habits. For example, a single taxpayer making $20,000 a year would save $60 in the first year, while a married couple with two children earning $60,000 would save $320, according to accounting firm Deloitte & Touche. Within five years, the single taxpayer would save $300 a year with the married couple saving $1,600.

Opponents also criticized the plan for giving only token relief to middle-class taxpayers who are most likely to spend their tax savings. The plan reserves the biggest savings for rich Americans, who already have plenty of spending money and are far more likely to invest the money, they said.

A couple with two children earning $200,000 annually would save $1,174 in the first year and $6,505 within five years, according to Deloitte & Touche.

Even some middle-income taxpayers said that they would put their tax savings in the bank rather than into shopping.

Rudy Martinez, a hospital orderly who lives in South Pasadena, and his wife, Debra, a leasing agent, earn a combined $65,000 a year. Even a few hundred dollars of tax savings would be welcome, Martinez said, but he figures to save the money in case the economy weakens further.

“I’ll just stick it in savings,” he said. “Our monthly earnings pay for our expenses anyway.”

Supporters of the Bush plan argued that there is nothing wrong with stimulating investment in economically productive activities.

For example, the promise of lower tax brackets could coax a small-business owner to hire new employees or open a new store. And free of the concern that their extra earnings would be drained by taxes, it would encourage workers to volunteer for overtime.

Bush sounded this theme as he introduced his tax plan to representatives of the U.S. Hispanic Chamber of Commerce and other Latino business groups invited to the Rose Garden on Thursday morning.

“We must give overcharged taxpayers some of their own money back,” the president said. “We must give low-income families fairer treatment. We must give small businesses a better chance to grow and to hire.”

Congressional Republicans are already eyeing changes in Bush’s package. Lott and other Republican leaders want to add a cut in taxes on dividend income and other capital gains. Corporate lobbyists are leaning hard on their GOP allies to do more for business.

And many Republicans see Bush’s proposal to ease the marriage penalty as far too limited, noting that it has no effect on people who do not itemize deductions on their returns. Some Republican leaders are openly resisting Bush’s admonition that they not exceed his $1.6-trillion target for the 10-year revenue loss.

Democratic leaders are trying to build support for a proposal to allocate one-third of the surplus for tax cuts, one-third for new spending and one-third for debt reduction.

But they are scrambling to construct a Democratic alternative to demonstrate that, as Senate Minority Leader Tom Daschle of South Dakota put it, “Democrats support a major tax cut for all taxpayers this year. But we want to cut taxes the right way.”

Seeking to slow the apparent momentum behind the Bush proposal, Democrats are urging a more careful look at its cost and a more cautious approach to proposals to cut taxes further.

“Both ends of Pennsylvania Avenue need to call a timeout,” said Sen. Max Baucus of Montana, a senior Democrat on the Senate Finance Committee. “We’re on the verge of a feeding frenzy that we should at all costs avoid.”

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Gerstenzang reported from Washington and Hamilton from Los Angeles. Times staff writers Janet Hook in Washington and Hang Nguyen in Los Angeles contributed to this story.

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* TARGETED CUTS

Some taxpayers would benefit more than others from Bush’s tax cut proposal. C1


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