- The Washington Times - Friday, May 25, 2001

The $1.35 trillion tax cut is expected to have a powerful effect on the economy, helping to inoculate it from recession and substantially spur growth by the end of the year.
A planned tax rebate of $50 billion to $100 billion is due to be disbursed in rebate checks ranging from $300 to $800 and arriving in taxpayers mailboxes at the end of the summer. Under the Senates version of the tax bill, the rebate would be tilted toward low-income taxpayers, who are the most likely to spend it immediately.
That should pack quite a punch for the economy, boosting growth by half a percentage point in the second half of this year and adding as much as 1.5 percent to growth early next year, according to private and government estimates.
"Thats a very big number," said Treasury Secretary Paul H. ONeill in an appearance on Capitol Hill this week, describing the immediate half-point bump in growth that would come from a $50 billion rebate flowing to taxpayers this year. "It would make a difference."
Federal Reserve Chairman Alan Greenspan emphasized that the economy remains vulnerable to a prolonged downturn in a speech before the Economics Club of New York last night. He downplayed fears that inflation will pick up along with growth later this year.
"The period of subpar economic growth is not yet over," he said, "and we are not free of the risk that economic weakness will be greater than currently anticipated, requiring further policy response."
Fresh evidence of the economys fragility also emerged yesterday with reports of another jump in unemployment claims to 405,000 last week and an unexpectedly sharp 9.5 percent drop in new home sales last month. Home sales have been one of the strongest points in the flagging economy.
The continued economic weakness renewed talk of recession on Wall Street yesterday. Stocks also were jarred earlier this week by fears that the Democratic takeover of the Senate would derail the tax bill. But those fears were put to rest yesterday by Vermont Sen. James M. Jeffords decision not to leave the Republican Party until the bill is signed by President Bush.
While the biggest economic impact of the bill will come in the first six months because of the rebate, Mr. ONeill and private economists said the steady trickle of another $1.3 trillion in tax relief over the next decade would continue to promote growth in the economy.
Mr. ONeill pointed out that the long-term impact is greater as a result of the administrations hard-fought battle to ward off amendments that would have repealed the tax cuts in future years if surpluses didnt materialize.
"As people can be certain about the reductions in the rates, they will make decisions based on having more cash than they currently do" and be able to make concrete spending plans, he said.
Sung Won Sohn, chief economist with Wells Fargo & Co., said the tax cuts will help stimulate a sizable upswing in the economy later this year.
"The Bush tax cut should kick in this summer" just as large interest rate cuts ordered by the Federal Reserve are giving their biggest lift to growth and the drag on the economy from high gasoline prices and a liquidation of business inventories is subsiding, he said.
Wells Fargo estimates a substantial stimulus from the tax cut next year, peaking with a 1.4 percent addition to economic growth in the first quarter and adding from 0.6 percent to 0.8 percent in the remaining quarters of next year.
Fed Governor Laurence Meyer, in a speech yesterday in Edinburgh, Scotland, also noted the tax cuts potential to "complement" interest rate cuts and gradually nurture the economy back to healthier levels of growth,
Mr. Greenspan did not mention the tax cuts in his speech last night, but he stressed that this years sharp rise in energy costs threatens to weaken the economy further rather than spark inflation because it acts like a tax on consumer and business spending.
Rising labor costs, rather than raising inflation, have squeezed corporate profits and choked off investment spending, he said, putting a further drag on growth.
Mr. Greenspan earlier this year had urged Congress to enact a tax cut as a kind of "insurance" against recession, should the economic downturn prove to be longer and deeper than he expected.
Many economists say that is precisely how the tax cut is functioning. David A. Levy of the Jerome Levy Economic Institute said by his estimates, the economy sank into a recession this spring and would have continued to wallow in recession until early next year without the tax rebate.
A rebate of $50 billion to $100 billion is big enough to pull the economy out of contraction, he said, but anything less than that leaves the economy at risk.
Like most private economists, Mr. Levy previously doubted that the tax cuts would be passed in time to help the economy much.
"Many observers expected the debate to go on into the summer," he said. But the unexpectedly swift passage of the bill this week in a rush to get it to the presidents desk by Memorial Day forced the institute and other economic forecasting groups to change their outlooks.
Mr. Levy said the turning point came when Congress decided to mail out the tax rebates before the start of the next fiscal year on Oct. 1, ensuring a quick and powerful impact on the economy.
The move substantially reduces the drag on the economy from this years estimated $281 billion federal budget surplus.
L. Douglas Lee, president of Economics from Washington Inc., a local forecasting firm, said that if consumers spend a quarter to half of the tax rebate in the second half of this year, economic growth would jump to a robust annual rate of 4 percent to 5 percent.
"Prepare for a big jolt to consumer spending, particularly on big-ticket household goods," he said.
But the downside is that long-term interest rates, such as those on 30-year mortgages, will be higher because the tax cuts will slow down the governments schedule for paying off the national debt, he said.

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