- The Washington Times - Friday, June 22, 2001

David and Karen Smith are looking forward to getting their $600 tax rebate in the mail next month, and plan to use it as a down payment on their sons college education.

"Americans don´t save much. We´re in the 2 percent that saves," said Mrs. Smith, whose son Michael hopes to fly planes one day and perhaps attend the Air Force Academy.

The Lake Elizabeth, Calif., couple´s determination to resist spending their $600 tax windfall illustrates why economists are optimistic that the $1.35 trillion tax cut will help to boost America´s record-low savings rate as well as give a lift to spending and help the sputtering economy.

Anywhere from a quarter to a half of this year´s $100 billion tax rebate will be saved, not spent, and a good proportion of the tax-rate reductions phased in in future years is likely to be saved as well, economists say.

That means the tax cut could be a powerful force in reversing a worrisome and decades-long trend that plunged the savings rate to below zero in the last year for the first time since the Great Depression, and from 10.9 percent in 1982. The negative savings rate means Americans are dipping into their savings to pay for purchases.

"The cuts will provide enough extra wherewithal to flip the measured personal saving rate into positive territory, and we believe it will stay there for the foreseeable future," said Richard Berner, chief U.S. economist with Morgan Stanley Dean Witter.

Morgan Stanley sees the savings rate surging from its current level of -0.7 percent to 0.5 percent this summer if consumers save 60 percent or $60 billion of the tax rebate.

"In effect, the rebate checks are a down payment on the withholding changes that will all fall into line on January 1," permanently lowering tax rates, said Mr. Berner. "Consumers will regard a major portion of the rebate — but not all of it by any means — just as they would a permanent tax cut."

The rebate will also "pack a punch" for consumer spending and the economy, he said, raising the growth rate from anemic levels near 1 percent in the first half of the year to more than 2 percent in the second half.

The Federal Reserve´s Boston bank president, Cathy Minehan, predicted this week that taxpayers will spend about half their tax rebates, which range up to $300 for single taxpayers and up to $600 for married couples.

The rest will be put to good use paying down a record load of debt and adding a cushion of savings, she said.

"It may keep the consumer in a buying mood" and help avert a recession this year, she said.

Washingtonians interviewed this week appear bent on spending rather than saving their rebates.

Diamond Peyton, a schoolteacher from Fort Washington, thinks she´ll probably spend her family´s $600 rebate on her three children, Javon, Dequane, and Lakaya.

"I´m a shopaholic. I love to spend," she said.

But she added that her husband, Melvin, who is in the home security business, may want to split the rebate with her and save his share.

"That´s what we did with our lump-sum tax refund this year," she said, noting that her husband used his share of the tax refund as a down payment on a new truck.

With the rebate, "My husband, he´d probably want to save it," she said. "He likes to put money away for a rainy day."

Gulam B. Qadabakhsh, a Persian-carpet repairman who lives in the District, said he also will spend his rebate on his five children in Iran.

With so many bills, "I have to spend it," he said.

A retired government worker from Hyattsville asserted that the $600 rebate is too small to save. "You can´t exactly invest $600. We´ll spend it," he said. "It´ll come in handy as Christmas money."

Quite a few Washington taxpayers interviewed did not realize they would be receiving a rebate in the mail next month. The Internal Revenue Service will send out notices in the next few weeks informing taxpayers of the amount of their rebates, and then mail out the rebate checks between July 20 and Sept. 30.

"I had no idea about that," said Nasir Ali, a cashier at the "Good News" stand at Prince George´s Plaza. He said he read the headlines about the tax cut in the newspapers he sells but was not aware of the retroactive refund for taxes paid this year.

"I have no idea how I´m going to use it. I´ll have to think about it," he said.

Economists say that low- and moderate-income taxpayers are more likely to spend their tax rebates, while high-income taxpayers are more likely to save them.

A survey of the top 1 percent of income-earners by U.S. Trust this week found that 68 percent plan to save or invest their tax cuts.

That should go a long way to put savings back into positive territory, since the affluent households are the ones that have driven down the savings rate in recent years, economists say. Consistent double-digit gains in the stock portfolios of the richest Americans during the 1990s induced them to spend more of their wealth and save less.

Neal Soss, economist with Credit Suisse First Boston, expects wealthier households to increase their savings gradually over the next few years to make up for big losses they suffered with the downturn of the stock market in the last year.

But Credit Suisse expects many more taxpayers to spend their rebates on cars, appliances and other big-ticket items, which Mr. Soss maintained is a kind of savings. Purchases of such durables are more like investments than consumption, he said.

Lehman Brothers economist Jeffrey M. Feiner expects 90 percent of the tax cuts to be spent, particularly on higher-priced items since taxpayers may view them as a windfall.

Even if only 10 percent is saved, however, that should help to raise abysmally low savings, he said.

"The tax cut comes at a good time and could be an important catalyst in the long-awaited recovery," he said.


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