At a lavish White House ceremony, President Bush yesterday signed into law the third largest tax cut in US history, billed as worth $350bn over 10 years. However, outside analysts say it could end up costing over $800bn and lock the US into budget deficits for a decade.
Even though it does not meet Mr Bush's original demand for the elimination of tax on shareholder dividends, the "jobs and growth" package is a substantial political victory for the White House.
For all the fierce Democratic complaints that the measure is tilted towards the rich, it will enable the President to reject charges that he is not doing enough to revive the anaemic US economy, likely to be a central issue in the 2004 election campaign.
Under the deal thrashed out by Senate and House negotiators, the top rate of dividend tax drops from 39 per cent to 15 per cent, while the capital gains tax rate goes down to 15 per cent from 20 per cent.
Income tax cuts already scheduled from 2004 to 2006 will be accelerated this year, while both child tax credit and married taxpayer exemptions will be increased. The bill raises depreciation tax write-offs for corporations, and contains special concessions for small businesses, a key Republican constituency in next year's election.
But the damage to public finances will be massive. This year's federal deficit is set to top $300bn, a record, while economists warn that the real cost of the bill, including concealed tax cuts and extra interest payments on federal debt, could reach $900bn.
This would wipe out any projected surplus for the next 10 years, just when government finances must cope with the extra burden of retiring baby-boomers.
The concealed costs lie in the "sunset" clauses attached to many of the provisions. To keep the package inside the $350bn ceiling insisted on by a group of moderate Republicans, these cuts theoretically expire at the end of next year.
Not to extend them, however, would be tantamount to raising personal taxes, virtually unthinkable by a Congress that is likely to remain under Republican control after the next election. To all intents and purposes, therefore, the cuts will be permanent.
At that point, if the economy remains sluggish, the only way to keep deficits under control would be to cut government spending on health care and non-mandatory programmes - which Democrats believe may be an undeclared object of the exercise.
But if the economy recovers, the deficits would add to upward pressure on interest rates, which might already be on the increase if the US has difficulty financing its current account deficit, expected to hit $500bn, or 5 per cent of GDP, this year. In a foretaste of the massive new borrowing ahead, Congress yesterday approved a $1,000bn increase in the statutory federal debt limit to $7,400bn.
Economists also doubt the cuts will have much short-term impact on growth, which has slowed to 1.5 per cent.
A Brookings Institution study suggests that the richest 1 per cent of taxpayers will get 29 per cent of the benefits of the package, while the poorest 20 per cent will receive next to nothing.Reuse content