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Archive for Sunday, July 1, 2001

Limited tax cuts start today

Highest earners will see less money withheld from paychecks

July 1, 2001

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— The first installment of the tax cuts signed into law by President Bush takes effect today, but only for certain middle- and upper-income taxpayers. For most of them, the difference amounts to just a few dollars a week.

Amid all the attention to upcoming refund checks, many taxpayers may have overlooked a part of the 10-year, $1.35 trillion tax relief package that reduces the four highest income tax rates 28 percent, 31 percent, 36 percent and 39.6 percent by 1 percentage point beginning today.

For an estimated 35 million taxpayers, that means less tax will be withheld from their paychecks. Employers were notified several weeks ago by the Internal Revenue Service to get ready for the change.

Millions of taxpayers who do not earn enough to qualify will get nothing from this initial rate cut. The reduction does not affect the 15 percent bracket, which is the highest rate paid by an estimated 95 million taxpayers.

These people will have to be satisfied for now with their refund checks up to $300 for a single taxpayer, $500 for a head of household and $600 for a married couple filing jointly. Taxpayers in the higher brackets also are getting refund checks.

The checks reflect this year's savings from creation of a new 10 percent tax bracket, which is retroactive to Jan. 1. They will be mailed this summer and fall, based on the last two digits of a taxpayer's Social Security number.

Most taxpayers who do benefit from today's rate cuts will notice only a small change in their take-home pay.

According to H&R Block, a single taxpayer paid $1,300 twice a month will receive about $2 more in each paycheck. A similar person paid $2,500 twice monthly will get about $13 more in each check.

The union-funded Citizens for Tax Justice estimated that the vast majority of those affected by today's change about 29 million taxpayers who pay at no higher than the 28 percent rate would get an average cut of $3.88 a week, or about $101 for the rest of 2001.

Those paying at the highest tax rate, the estimated 868,000 taxpayers with average incomes of almost $1.2 million a year, would get about $150 a week, or a total of $3,894 on average.

Because today's 1 percentage point drop comes midway through the tax year, the reduction for 2001 is effectively a half percentage point, with the cut fully effective for 2002.

This year, the new 27.5 percent rate will apply to taxable income gross income minus deductions and personal exemptions for single people above $27,050 and married couples filing jointly above $45,200; other new rates take effect at various points up the income scale. The new 39.1 percent rate applies to taxable income above $297,350.

The four highest tax rates will drop an additional percentage point in 2004 and again in 2006, when they reach 25 percent, 28 percent, 33 percent and 35 percent, respectively.

For Republicans in Congress and the Bush administration, the only thing that matters is that tax cuts are taking effect, putting more money into people's pockets during a time of economic uncertainty. The July Fourth congressional recess gives politicians a prime opportunity to remind voters of that.

"We can go home and say we passed a tax relief bill," said House Speaker Dennis Hastert, R-Ill. "It will be a reality."

Most private economists say the refund checks and rate cuts combined could have a positive impact of about half a percentage point on the nation's gross domestic product, assuming taxpayers spend at least some of the money. The total tax cut for fiscal 2001 of about $74 billion is still only a tiny fraction of the nation's $10 trillion economy.

"Cutting income tax rates is the strongest fiscal policy stimulus for our economy," said Treasury Secretary Paul O'Neill. "And it is happening exactly when the economy needs it."

Democratic critics of the tax cut say that's a meager economic return for a measure that costs an estimated $1.35 trillion over 10 years. They argue that the tax cut will consume so much of the projected federal budget surplus that other priorities will be starved for cash. The squeeze could be starting with signs of reduced corporate tax revenues due to lower profits.

Sen. Kent Conrad, chairman of the Senate Budget Committee, said the tax cut will eventually force "raids" on the Social Security and Medicare trust funds to make good on commitments like national defense and education spending.

"I fear we are facing a real problem," said Conrad, D-N.D.

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