- The Washington Times - Tuesday, October 2, 2001

Consumers are mostly saving their tax rebates, making it likely that Congress will aim any second round of economic stimulus this month at businesses and lower-income households that are more inclined to spend additional cash.
A report from the Commerce Department yesterday showed that despite a rebate-fueled jump in disposable income of 1.9 percent during August and a similar increase in July, consumers used their $300 to $600 tax rebates to pay off debt and build up their bank accounts quadrupling the savings rate to 4.1 percent.
The $35 billion in tax rebates, the last of which were mailed last week, were intended to boost consumer spending and help keep the faltering economy from falling into recession. While rebates that are not spent contribute nothing to economic growth, they can help consumers shore up finances during a period of increasing layoffs and dwindling stock portfolios.
Higher-income consumers received the bulk of the rebates, and the economic response was disappointing, congressional sources say. President Bush and legislators now are discussing a second round of tax cuts and spending boosts for businesses and lower-income households, the sources say.
The rebates were sent to individuals and married couples who paid income taxes last year, but most low-income households did not pay income taxes. Many did pay payroll taxes, however, to finance their Social Security benefits.
Former Treasury Secretary Robert E. Rubin, echoing the views of Democrats, last week urged congressional leaders to provide rebates of payroll taxes or refundable tax credits to less-affluent households.
Mr. Rubin said that group is most likely to spend the rebates, but other economists point out that many low-income households also are in debt and may use the money to pay off credit-card balances instead.
Mr. Rubin, who met twice with lawmakers along with Federal Reserve Chairman Alan Greenspan last week, argued against broad new tax cuts or benefits to businesses beyond the $15 billion airline-bailout package and $40 billion in rescue aid and reconstruction assistance already approved by Congress.
But Mr. Greenspan threw his support behind targeted tax reductions for businesses in light of a collapse of investment spending and profits. He favors write-offs for investment in software to help the ailing technology sector, and other investment deductions.
The White House and congressional Republicans also are inclined to cut business taxes.
Treasury Secretary Paul H. O'Neill and White House economic adviser Lawrence Lindsey have advocated lower corporate income taxes, while House Republican leaders have pushed cuts in the capital-gains tax to try to boost the stock market.
A recession in profits and excess capacity prevented many businesses from increasing investment spending, even though the Fed ushered in dramatically lower interest rates this year. The Fed today is expected to cut rates by another half-percentage point, to their lowest levels since John F. Kennedy was president.
Consumer response to the rate reductions also has been weak, although it has spawned a spate of mortgage refinancings that have enabled homeowners to tap into some of their housing wealth and lower their debt burdens.
Consumers' reluctance to spend their tax rebates, which appears to have increased in the wake of the Sept. 11 terrorist attacks, also makes it more likely Congress will approve more direct spending to stimulate the economy most likely in the areas of security, defense and reconstruction aid.

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