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Bush, Democrats Spar on Stimulus
Strong, but Sides Differ
On Who Gets Tax Relief
January 19, 2008
WASHINGTON -- As President Bush laid out his vision for an economic stimulus that could reach $150 billion, Democrats in Congress and the administration diverged about how to spread around its benefits.
| President Bush, accompanied by Treasury Secretary Henry Paulson, laid out the principles of his stimulus package from the White House Friday. |
The tension is emerging as a sticking point amid broad consensus that the government should do something quickly to prop up the lagging economy. The White House wants tax cuts to help a wide range of individuals and businesses. Privately, it has floated a plan that focuses on rebates of up to $800 for individuals and $1,600 for married couples.
In addition to tax cuts, congressional Democrats say they also want spending targeted at specific groups such as the unemployed. They have also discussed denying rebates to taxpayers who earn more than $85,000 and offering them to those who don't pay income taxes at all. Both ideas are likely to be opposed by the White House, at least initially.
President Bush's announcement of his plan Friday did little to calm financial markets. Market observers suggested Mr. Bush's comments disappointed investors who were expecting more. The Dow Jones Industrial Average, which has fallen nearly 9% since the beginning of the year, opened higher but lost ground as details of the president's speech emerged. The Dow ended the day down 59.91, or 0.5%, at 12099.30. It shed 4% in the past week.
The central elements of the plan will likely echo the package put in place during the slowdown that followed the end of the dot-com bubble in 2001. According to economists, the results were mixed. Many say the rebate checks, which were mailed only to U.S. taxpayers, successfully boosted spending. But certain business tax breaks from 2001 through 2004 had a more limited effect.
"My judgment, and I think the judgment of most of the empirical analyses that have been done, was that the rebates in 2001 did have some impact on spending and that that was of some assistance in keeping the 2001 recession relatively moderate," Federal Reserve Chairman Ben Bernanke, a former top economic adviser to President Bush, told a congressional committee in the past week.
Some have questioned the impact of the 2001 rebate. Joel Slemrod, an economics professor at the University of Michigan who has studied the rebate checks, said the infusion must be measured in the context of an economy whose annual output at the time was around $10 trillion. "That's not a huge stimulus," he said.
Despite the market's disappointment, the plan President Bush announced Friday, which is equivalent to about 1% of gross domestic product, came in at the high end of expectations in Washington. Administration officials said it would make room for roughly half a million jobs that otherwise wouldn't exist. In an interview, Treasury Secretary Henry Paulson said the president envisions certain business tax breaks that would be in place for no more than a year, to spur companies to make immediate investments.
"This growth package must be built on broad-based tax relief that will directly affect economic growth, and not the kind of spending projects that would have little immediate impact on our economy," Mr. Bush said at the White House on Friday morning, in a warning shot for Democrats.
Democrats argue the administration's approach avoids the real problem: homeowners squeezed by the housing mess and lower-income people hit by higher prices for heating oil and other goods. Democratic Sen. Max Baucus, chairman of the committee with jurisdiction over tax issues, plans a series of hearings on stimulus proposals starting Tuesday. In a written statement, he said he supports tax rebates as a "foundation" of the bill, but also wants to "build beyond tax relief to further address the needs of Americans."
For all their haggling, Democrats and Republicans said momentum was strong behind getting a deal, because both sides fear the political and economic price if nothing is done.
The differences reflect the still-fuzzy nature of the economic problem officials are trying to address. Unemployment remains fairly low at 5% and the overall economy, while slowing, isn't necessarily headed for a recession. "It is still a relatively healthy economy," said Mr. Bush's top economist, Ed Lazear, at a briefing Friday. "We want to keep it that way, and that's the reason that we're moving in this direction."
In the Senate, split almost exactly between Democrats and Republicans, leaders will have to find a way to avoid a drawn-out debate. Republicans want higher earners to be part of a tax rebate. Even some Democrats in the Senate are likely to want to push the $85,000 cap higher. The next step is a Tuesday meeting between top lawmakers and Mr. Bush.
In the summer of 2001, the government mailed a total of $38 billion in $300 and $600 one-time rebate checks to two-thirds of U.S. households. A 2004 study by economists from the U.S. Labor Department, Princeton University and the University of Pennsylvania estimated that the rebates directly increased aggregate consumption expenditures by about 0.8% in the third quarter of 2001 and 0.6% in the fourth quarter of 2001. In other words, most of the rebates quickly turned into spending.
Multiple studies say those most likely to spend rebate checks are low- and middle-income households with less access to credit. That boosts Democratic arguments that the rebates should be made available even to those who don't pay taxes.
"The largest bang for the buck tends to come from households that are relatively constrained in their ability to spend otherwise," said James Poterba, head of the economics department at the Massachusetts Institute of Technology.
Another likely part of the stimulus package is expedited tax deductions for businesses, designed to encourage investment. Between Sept. 10, 2001, and Jan. 1, 2005, businesses were allowed to immediately deduct from their taxes between 30% and 50% of investments on things like machinery and equipment.
Two University of Michigan researchers found that the tax incentive added 100,000 to 200,000 jobs and increased the gross domestic product by a scant 0.1% to 0.2%, a finding bolstered by other research. One problem: Spreading incentives over several years didn't provide an immediate spur to spending.
Phillip Swagel, the Treasury Department's assistant secretary for economic policy, said many businesses didn't take advantage of the incentive because they were coming off several quarters of losses and didn't need the extra tax break. This time, many businesses, including those in high-tech, remain profitable and might use a tax break if they could get it.
In laying out principles for what Mr. Bush termed a "growth" package, the president and his top advisers avoided talking about specifics. The unofficial White House plan, floated by the administration on Capitol Hill in recent days, would suspend the federal tax code's 10% income tax rate. That's the bottom rate that everyone with taxable income pays.
But millions of lower-income workers pay no federal income tax because existing breaks wipe out their exposure. According to Jason Furman at the Brookings Institution, 57 million households would get no benefit. That includes about 30 million households with wage earnings. The rest are mostly retirees. There are about 149 million households in all, which means about 37% of the total would get no benefit. Conservatives question the fairness of giving rebates to people who paid no income tax.
Democrats took the White House silence on details as a sign that it's willing to give ground. They are working on alternatives, such as a rebate for everyone who files a tax return. Other possibilities are rebating payroll taxes or sending rebates to those who receive the Earned Income Tax Credit or the Child Tax Credit.
--Michael M. Phillips and Mark Gongloff contributed to this article.
Write to Sarah Lueck at sarah.lueck@wsj.com
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