--- by CHRISTOPHER ANSTEY ---
WASHINGTON (AFX) - The 1.6 trln usd ten-year tax cut proposed by President-elect George W Bush is likely to be cut to under 1 trln before being passed by Congress later this year, analysts said.
"The odds are extremely high we're going to have a tax cut enacted into law this year (and) odds favor 700 bln-1 trln usd. The higher you get, the more Bush has to cut a deal with the Democrats," said Ethan Siegal, analyst at the Washington Exchange.
Joe Leber, political analyst at Washington Analysis, said "We're in for a tax cut somewhere in the neighborhood of 800 bln- 1 trln usd over ten years."
Democrats, along with some Republicans, have said the 1.6 trln usd tax reduction proposed by Bush during the election campaign is too big to protect budget surpluses and still increase some spending, analysts noted.
The composition of the tax cut will also be subject to political wrangles, including within the Republican party, as Democrats favor more progressive cuts, and Congressional Republicans favor reductions in taxes on businesses and estates.
The first interaction between a Bush official and Congress on the tax cut came Wednesday, when Treasury Secretary designate Paul O'Neill underlined his support for the Bush plan in his Senate confirmation hearing.
Democrats, including temporary Senate Finance Committee chairman Max Baucus, questioned O'Neill on the size and composition of Bush's tax cut, arguing that the path of budget surpluses and debt reduction of recent years has helped stimulate the economy.
O'Neill said he shares the goal of "maintaining fiscal discipline," with Clinton Administration predecessors Robert Rubin and Lawrence Summers, but added that he strongly supports Bush's tax cut plan. Republicans asked O'Neill whether he would support other tax cut proposals not initially included in Bush's plans, but he did not respond specifically.
"O'Neill was very cautions at the hearing, and stayed within the bounds of the Bush campaign platform on tax cuts and fiscal policy... he didn't cause trouble for himself down the road," Siegal said. O'Neill said he expects the Bush administration to present a specific plan to Congress within six weeks.
Bush's tax cut is composed of across-the-board reductions in marginal income taxes, which O'Neill described as a priority, along with eliminating the "penalty" of higher taxes on married couples, and phasing out the estate tax on assets bequeathed after death. The Democrats will probably favor rate reductions for lower and middle income taxpayers, while resisting marginal rate cuts for high income individuals, analysts said.
Congressional Republicans may introduce a capital gains tax cut, along with business tax measures such as greater allowance for depreciation against income, analysts said.
"Everybody will have to compromise, because everybody is going to have a veto," said William Frenzel, political-economic scholar at the Brookings Institu tion, and a former member of Congress. The president has veto-power over all Congressional legislation, while the Senate is split 50-50 between the Democrats and Republicans; the lower body House of Representatives has a narrow Republican majority.
Frenzel predicted the final tax cut package will include some corporate tax cuts, and lean in a more progressive direction than the original Bush tax cut.
Leber said the package could include some capital gains tax reduction, but he doubted that high income individuals would see any reduction.
The first debate will come within the Republican party, as Congressional Republicans seek to influence the Bush Administration's proposals.
In recent years, the Republican majority in Congress has pushed tax cuts designed largely for political constituents, rather than economic stimulus, Siegal said, including marriage and estate tax relief. The Congressional Republicans have argued that Bush ought to pursue a series of separate tax cut bills in these and other areas, rather than a single tax cut package, Siegal noted.
This approach would be more likely to see Congressional passage, because it is difficult to oppose any single, smaller-sized tax cut, according to the argument. But Siegal said Bush may resist this effort, to focus on the marginal rate cut.
Another issue is whether to accelerate implementation of the tax cut to make it effective for the current year. O'Neill said Bush is studying the subject, but has made no decision.
Frenzel said the ultimate deal would probably be enacted after the Congressional recess in August, and before the Thanksgiving holiday in late November.
Analysts said the impact of the probable tax cut on the economy in the near-term would most likely only be indirect.
"It may have an impact at the margin on confidence," Frenzel said, although the amount of tax reductions -- even if front-loaded -- is unlikely to be large for this year.
"It might help the economy with front-loading... from the psychological standpoint, if Americans expect tax cuts, then maybe consumer confidence could get a boost," Leber commented. Siegal cautioned that it is improbable the entire tax cut would be implemented in the near term, because "there's not enough surplus," to pay for it.
The Clinton Administration forecast an on-budget surplus of 71 bln usd this year.
The outgoing administration also revised its ten-year on-budget surplus forecast this week, down to 1.643 trln usd.
"The numbers will change under Bush," Leber said, as the incoming White House releases its own forecasts.
Separately, the Congressional Budget Office (CBO) is expected to release its budget forecasts on Jan 31.
Higher forecast surpluses could help the passage of a larger tax cut bill, analysts said.
"The CBO estimate will be much higher - as big as 2 trln usd -- then a 1.6 trln tax cut doesn't look as expensive, Leber said.