WASHINGTON — Doubts run deep in the fashion industry about the effect on the sagging economy from a $350 billion tax-cut package crafted by GOP congressional leaders this week and poised for congressional passage as early as Thursday night.
This story first appeared in the May 23, 2003 issue of WWD. Subscribe Today.
The menu of tax cuts over the next 10 years means consumers this year will have about $15 billion more in their paychecks from accelerated income tax breaks. Families with children will get an additional $400-per-child rebate for 2003, affecting 25 million households.
If anything, passage of the tax cuts — less than half of President Bush’s original $726 billion proposal — underscores the struggle between Democrats and Republicans to position the economy’s health as a 2004 campaign issue.
There’s another certainty: Those in the fashion industry, faced with what Treasury Secretary John Snow calls a “soggy” economy, aren’t counting on tax-cut results for a resurgence in business.
Speaking at Liz Claiborne’s annual meeting on Thursday, Paul Charron, chairman and chief executive officer of the $3.7 billion firm, said, “We are in a challenging economic environment. We are in the third year of a soft economy with few signs of improvement. The apparel sector is plagued by deflation.”
Charron said the first quarter has seen “no improvement in the economy or apparel sector.”
Many contend that the last tax cut failed to act as a stimulant or catalyst for economic recovery.
Bud Konheim, ceo of Nicole Miller, said with the $10 trillion U.S. economy, the tax cuts will provide a pittance of additional disposable income to make a difference in business.
“What really makes the economy grow is a tremendous feeling of optimism — if consumers are reading about job cutbacks and terrorism, they don’t have that feeling,” Konheim said.
Carl Steidtmann, chief economist at Deloitte Research, called the President’s slimmed-down tax package “better than nothing,” but he isn’t expecting it to provide much of an economic jolt.
“To expect it to alter the path of an economy this size is wishful thinking,” he said. “The sluggishness in this economy really reflects the impact of several unprecedented events: two wars, terrorist attacks, anthrax, bad weather…SARS. The problem isn’t in Washington.”
One executive from a large apparel concern, who asked not to be named, said, “I don’t know and I don’t think the government knows” about how the tax cuts might stimulate business.
W. Lee Capps 3rd, senior vice president of finance and chief financial officer at Kellwood Co., said, “The tax cut should help by increasing household discretionary funds and hopefully spending, but until we see a pickup in business spending and a resultant increase in consumer confidence, we are not anticipating a significant recovery at retail.”
Urban Institute senior fellow Leonard Burman called the tax package a “hodgepodge,” with provisions expiring throughout its 10-year life span, after which the taxes will be reinstated barring congressional action.
“We’re going to have a sort of jack-in-the-box tax system, where all these cuts happen then, all of a sudden — pop — they’re back again.”
The revolt by a few moderate Republicans in the Senate was the main reason Bush’s original $726 billion plan was pared back. The moderates joined Democrats in their concern over how the tax cuts will fuel the ballooning deficit and in turn cause a spike in interest rates that could dampen investment and lead to federal cutbacks in social programs at a time when states are also strapped for cash.
The President’s call to eliminate taxes on dividends was the most controversial part of his proposal, providing almost half of its value. Critics said having no dividend taxes would largely benefit the wealthy.
The tax-cut compromise calls for dividends and capital gains paid to upper-income taxpayers to be taxed at 15 percent through 2008 instead of the same rate as regular income, which can run as high as 38.6 percent. About 80 percent of dividends are paid to the upper-income bracket. Lower-income taxpayers would pay a 5 percent tax on dividends and capital gains through 2008 and nothing in 2009.
Individual income tax cuts, set to take effect in 2006 under a $1.6 trillion tax cut passed in 2001, would be phased in this year and be retroactive to Jan. 1. In addition, the deduction for small business expenses was increased to $100,000 from $25,000. For larger companies, the cost of capital investments could be written off by 50 percent through next year. Now the write-off is 30 percent.
Mary Walker, director of tax and finance at the International Mass Retail Association, said if President Bush, as promised, signs the tax cuts into law in the next 10 days, consumers will see more money in their checks within the month.
“If you put more money into people’s pockets…that will result in higher retail sales,” she said.
Despite the diminished size of the tax cuts, Bush declared victory in a Capitol Hill visit, as leaders from both parties continued to exchange jabs.
From the House floor, Minority Leader Nancy Pelosi (D., Calif.) blamed the White House for “the unraveling of fiscal responsibility.” In response, Ways & Means Chairman Bill Thomas (R., Calif.) accused Pelosi of fearing she’ll “remain in the minority” when the tax cuts become law and there’s “a positive reaction from the American public.”
Steve Pfister, senior vice president of government relations with the National Retail Federation, said this year’s tax cuts will set the stage for further Bush administration calls for reductions next year, and if reelected in 2004, after that.
“This lays down the market for the tax reduction debate to continue throughout the election cycle,” Pfister said. “It’s a populace message. It gives the President the perfect opportunity to say ‘more money is in your pocket.’ It’s great political fodder.”