When it's pieced together, will recovery plan work? White House hopes for timely takeoff

January 30, 1992|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau of The Sun Richard H. P. Sia of The Sun's Washington Bureau contributed to this article.

WASHINGTON -- Whether it is the extra 20 cents a day that the average taxpayer would get for each child or the big-bucks capital gains windfall for wealthy investors, President Bush is looking to tax cuts to restore public confidence in a still-stricken economy.

But whether a budget that is long on assurance and short on certainty can do the trick is an open question. What is less in doubt is that the economy continues determinedly in the doldrums.

Even as Mr. Bush was delivering his budget to Congress yesterday, a sliver of good news -- a 0.3 percent annual growth in the nation's output of goods and services in the fourth quarter of last year -- was unable to prevent the 1991 gross national product from registering its first overall decline since 1982.

Analysis

The economy shrank last year by 0.7 percent, contrasting with a healthy growth rate of around 3 percent.

Add to this the prospect of a deficit that resists reduction, unemployment that has become a stubborn presence and subterranean consumer confidence, and the odds facing Mr. Bush's recovery blueprint become clear.

The administration is basing its best hopes on the notion that the already-low interest rates will combine with the increasing focus on economic revival and the steps ordinary Americans have been taking to reduce their debt load, to make the time for economic takeoff ripe. In an election year, timing is all.

In the unlikely event that Congress adopts all of Mr. Bush's program, the official projections suggest that economic activity in fiscal 1992 would grow at 2.2 percent against an expected, business-as-usual level of 1.6 percent, and that in fiscal 1993, 1994 and 1995 it would be back to the historical norm of around 3 percent rather than languishing around 2.5 percent.

Much of the stimulus would come from the array of tax cuts Mr. Bush has proposed. Here officials like to concentrate attention on the aggregate benefits: $4 billion-plus in benefits sounds better than $75 a year -- or 20 cents a day -- for each child in a family in the 15 percent tax bracket.

Another $25 billion will come from reducing the amount of taxes withheld by employers. In 1991, nearly 80 million low- and middle-income taxpayers claimed $70 billion in tax refunds, an average of $900 per person.

Administration officials know that people often prefer to have more than necessary withheld so that they can look forward to an annual tax refund. But they also see this as soaking up cash that could be spent. They have compromised. They will draw up new withholding tables to reduce the $70 billion in surplus withholding by $25 billion, providing extra spending money without entirely erasing the prospect of a refund.

Confronted with the argument that another $1 a day or so is unlikely to unleash a massive spending spree, one senior Treasury official said yesterday: "Out there in the real world, that is how you always make up $25 billion -- in $50s, $100s, $1,000s. That's how you get there. The aggregate effect is $25 billion. There are an awful lot of taxpayers out there."

But before anyone rushes out to spend the extra money, they should consider that recently legislated increases, including creation of a 31 percent top tax bracket, a rise in the Medicare wage cap and increased taxes on tobacco, beer, wine, spirits and gasoline, are actually taking an extra $52 billion from taxpayers this year, according to the Tax Foundation, which monitors the taxes imposed by federal, state and local governments.

The foundation, analyzing Mr. Bush's tax proposals against the major initiatives in Congress, judged the overall Bush budget plan more generous than any on Capitol Hill. It estimated that a "typical" family with an income of $54,926 would save a total of $3,410 in taxes. This assumes that they have two children each eligible for the extra $500 tax deduction; buy their first home to qualify for the proposed $5,000 tax credit; and have $5,000 in asset-related income to benefit from the capital gains tax cut.

It is safe to assume that most American families will not be buying their first homes this year or next, or enjoying $5,000 in taxable capital gains. But the example illustrates how the Bush program could offer substantial benefits to some.

Perhaps more typically, according to the Treasury's own figures, a family with three children and an income of $40,000 would see its 1992 tax bill of $3,720 reduced by $56.25 through the increased tax deduction for children, which this year becomes effective on Oct. 1. With the deductible in place for the full year, the family's tax cut would be $225.

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