Can Uncle Sam Move the Bottom Line?

As profits disappear, Washington is determined to ante up a stimulus package to help get growth going again. But while the measures Congress is considering would give money to consumers and boost corporate cash flow, they probably won't spur the economy enough to make a big difference in the profits of most corporations.

There are two parts to the fiscal-stimulus plan that was passed by the House last month and has a good chance of becoming law. The part that's aimed at consumers could include a tax rebate for low-income workers--perhaps $14 billion in total--and an acceleration of income-tax cuts passed earlier this year. On the corporate side, the legislation would offer companies accelerated depreciation on their capital spending. That could cut corporate tax payments by as much as $39 billion in 2001, according to the Congressional Joint Committee on Taxation.

SMALL BOUNCE. The individual tax cuts could jump-start the profits of consumer companies--if Americans actually spend the money they save on their tax bills. But that's not what happened with the $38 billion tax cut approved in the spring, and the environment has worsened since then. "Everybody expected [the last tax cut] to create a big bounce in back-to-school spending," says Dan Niles, a tech analyst at Lehman Brothers Inc. But even before September 11, the stock market was sagging, as it became clear that households were socking away the money rather than spending it. Indeed, the personal savings rate jumped from 1% in June to almost 5% in September.

Similarly, the tax proposal could provide more business for capital-equipment providers, giving the economy a bit more juice. "It could tip the decision to drill a marginal well," says Jon W. Sauer, vice-president for corporate taxation at Apache Corp., a Houston-based oil producer.

But with factories and plants running at 76% of capacity in September, down from 82% a year earlier, most companies will be reluctant to spend even with the new tax breaks. That's especially true in the beleaguered telecom industry, which was one of the biggest capital spenders of the 1990s. In that industry, companies are jealously guarding their cash in hopes of surviving the continuing falloff in demand. "The package is better than nothing, but it's not going to generate the kind of investment that will yield the productivity gains we've had in the past," says Mary C. Farrell, senior investment strategist at UBS PaineWebber Inc.

The accelerated-depreciation proposal won't have much effect on the net income of companies that take advantage of the new breaks, because they will continue to use slower depreciation when they report to shareholders. An additional $13 billion could be added to the bottom line of U.S. companies if Congress repeals the alternative minimum tax on corporate profits and extends operating-loss carrybacks. But with profits at major corporations falling by $50 billion in the third quarter alone, tax cuts like these are a drop in the bucket. Only the revival of the U.S. economy can ensure a full-fledged profits recovery.

By Margaret Popper in New York

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