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Just How Big a Stimulus?

By Michael Englund With the May, 2003, tax-stimulus package enacted into law, it's up to the Bush Administration to craft details of how the plan could impact the economy over the near term. A number of media reports have taken as a given that the potential stimulus this year from the tax plan would be limited. But in truth, the total impact will depend on how aggressive the Bush Administration will be in constructing a rebate program and in "front loading" both check distributions and reductions in withholding rates.

That will be crucial if they wish to accelerate the stimulative impact of the legislation before the end of fiscal year 2003 -- and before the tax-refund distributions around April of 2004. But if policymakers move aggressively, and you can bet they're going to try, the package would provide a noticeable boost to household, business, and state government balance sheets through the second half of 2003. Indeed, the actual size of the boost may just surprise the doubters.

RETRO STYLING. At issue is how quickly the planned $109 billion in 2003 stimulus can be distributed to households in the form of spendable cash. Granted, the Treasury Dept. faces obstacles in identifying the ideal size and destination of each individual household rebate. If the White House can somehow distribute the bulk of the new tax relief during the third and fourth quarters despite these challenges, the boost to gross domestic product (GDP) growth likely would prove significant.

Of course, it's the retroactive component of the recent tax legislation that provides the underlying reason for a rebate program, since passage of the law means that most taxpayers have overwithheld through early 2003. Ideally, withholding rates in July would be set at "best-guess" levels of actual household tax liabilities going forward, with rebate checks used as the preferred vehicle for offsetting the overpayment of taxes in the first two quarters of the year.

Policy types are still dotting the "i"s and crossing the "t"s on matters such as new tax withholding tables and the size and timing of a tax rebate program. The White House may choose either an aggressive set of withholding rates designed to provide extra stimulus during the third and fourth quarters -- accommodating the "retroactive" nature of most new tax provisions -- or a more extensive rebate program than the limited "child tax credit" rebate specified in the tax bill.

MAKING ESTIMATES. A group called Economics from Washington has used numbers from the congressional Joint Committee on Taxation to come up with quarterly estimates of the recent tax cuts on an "accrual" basis. The group's assessment of the tax cuts on an accrual basis documents a sizable near-term impact, if the government can succeed in constructing an effective distribution plan. The tax cut in the third quarter should be roughly $66 billion, followed by $47 billion in tax relief in the fourth, and roughly $40 billion in tax reduction per quarter through the first three quarters of 2004.

The accrual estimates reflect when taxpayers likely will benefit from the new tax laws. Benefits are not enjoyed by taxpayers at the same time they are accrued for government accounting purposes because the huge process of reducing withholding taxes or mailing rebate checks to households takes time. Accrual estimates, however, allow tax experts to calculate when tax stimulus should take effect and provide a blueprint for assessing proposed tax withholding schedules and rebate plans.

Since the 2003 stimulus is concentrated in the year's second half, the ratio of tax relief to nominal GDP (on a quarterly, and not annualized, basis) soars to 2.4% in the third quarter and 1.7% in the fourth, before dropping back to 1.4% in early 2004. If Team Bush crafts a tax rebate program that allows "cash" distributions that come close to the "accrual" figures from the Economics from Washington estimates, then consumers and businesses would experience sizable corresponding cash stimulus.

PROGRAM PLANNING. A full rebate program would reach roughly $55 billion if the Treasury could perfectly estimate desired tax rebates, with lowered withholding rates providing the remaining $54 billion in tax relief for 2003, spread evenly between the third and fourth quarters. In practice, the Treasury would be unable to accurately estimate how to distribute the $8 billion in dividend and capital gain tax relief, the $9 billion in Alternative Minimum Tax relief, the $23 billion in small business tax relief, or the $19 billion in marriage penalty relief.

The legislation already accounts for a $16 billion rebate program for a child tax credit, and rebates may be possible for a portion of the $34 billion in tax bracket changes, if rebates were based on incomes reported in 2002. The Treasury has room to maneuver, and a rebate program could be put together that is similar to the one that returned $38 billion to taxpayers in 2001. The bottom line: Don't be too quick to write off this tax cut's ability to help goose economic growth the next few quarters. There may be a pleasant surprise yet to come. Englund is chief economist for MMS International

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