The $330-billion tax approved Friday by Congress will almost immediately add some fiscal stimulus to the economy.
But experience suggests that the full impact of the $7 billion a month of added purchasing power will not hit the economy until annual tax returns are filed early next year, said Jim Haughey, senior economist for Newport Communications. The lower tax rates are retroactive to last Jan. 1.
"Congress had been expected to give Bush tax cuts so the economic outlook -- a quick return to 3%-plus economic growth -- does not change," Haughey said.
The changes reduce federal tax withholding by more than two percentage points at the top of the wage scale but provide no tax reductions at the bottom for part-time or very low wage workers. Capital gains taxes are reduced from 20 to 15%, and the tax on dividends is capped at 15% in place of the 10% to 39% old marginal withholding rates.
"This mix means that the cut should be spent evenly across both consumer packaged goods and durable goods markets," he said. "The tax cut is big enough to have a measurable impact on the economy, but is still well short of the impact of the more massive Kennedy and Reagan tax cuts.
"Washington continues to hide what it is doing by burying an $80-billion a year tax cut in legislation that also includes some added spending and a bizarre set of expiration dates for the tax changes so that the whole package can be sold as a $330-billion tax cut over a 10-year period," Haughey said.
"Congress can say it cut the Bush request in half. It is smoke and mirrors. It is an $80 billion a year tax cut. Note that most of the 2004 tax cuts were achieved by advancing future tax cuts enacted in 2002."
But experience suggests that the full impact of the $7 billion a month of added purchasing power will not hit the economy until annual tax returns are filed early next year, said Jim Haughey, senior economist for Newport Communications. The lower tax rates are retroactive to last Jan. 1.
"Congress had been expected to give Bush tax cuts so the economic outlook -- a quick return to 3%-plus economic growth -- does not change," Haughey said.
The changes reduce federal tax withholding by more than two percentage points at the top of the wage scale but provide no tax reductions at the bottom for part-time or very low wage workers. Capital gains taxes are reduced from 20 to 15%, and the tax on dividends is capped at 15% in place of the 10% to 39% old marginal withholding rates.
"This mix means that the cut should be spent evenly across both consumer packaged goods and durable goods markets," he said. "The tax cut is big enough to have a measurable impact on the economy, but is still well short of the impact of the more massive Kennedy and Reagan tax cuts.
"Washington continues to hide what it is doing by burying an $80-billion a year tax cut in legislation that also includes some added spending and a bizarre set of expiration dates for the tax changes so that the whole package can be sold as a $330-billion tax cut over a 10-year period," Haughey said.
"Congress can say it cut the Bush request in half. It is smoke and mirrors. It is an $80 billion a year tax cut. Note that most of the 2004 tax cuts were achieved by advancing future tax cuts enacted in 2002."
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