U.S. farmers, now caught in the tightest costs-and-income squeeze since the 1980s, will welcome income tax rebates and other relief promised by the biggest federal tax cut since 1981. Like other Americans, however, they may doubt that the massive $1.35 trillion cut is a cure-all for all the nation's economic problems, from the turnrows to the gas pumps.
The tax measure, which passed both houses of Congress by comfortable margins, will reduce all income tax over the next decade and give rebates on taxes paid on 2000 earnings. President Bush signed the bill, which enjoyed the support of non-Republicans in Congress, including James Jeffords, the senator from Vermont who defected from the Republican Party just as debate on the measure got under way, on June 7.
The tax relief provisions are phased in gradually, and still others do not become effective until later in the 10-year life of the measure.
Bush, who made the promise of a tax cut a lead issue in his campaign last year, says the cuts, including the rebates, will infuse needed money into an economy that has shown a marked slow-down since the last months of 2000. The bill includes nearly all the provisions asked for by the president and congressional Republicans.
Democrats say that if all provisions of the measure are left in place until 2011, the real cost of the tax relief would be close to $1.6 trillion, which is nearer to the amount the president had originally sought.
First benefits of the bill are expected to come this summer, when rebate checks are mailed. The bill provides for $300 rebates for single people and $600 for couples who file joint returns. Individuals who earn less than $6,000 in taxable income and couples who earn less than $12,00 will not get the full rebate.
The bulk of the tax cuts will come in the form of reductions in the tax rates over the next 10 years. The bill immediately creates a new bottom tax rate of 10 percent that applies to the first $6,000 of taxable income for single and $12,000 for married couples filing jointly. That is the part of the measure that will lead to the mailing of rebate checks later this year.
The legislation gradually reduces the federal estate tax, and repeals it altogether 2010. Married couples get a tax beak, and contribution limits to 401(k) and individual retirement account programs are increased.
The bill provides that all tax cuts will be rescinded by 2011.
Other provisions include:
- The bill provides for estate tax rates to be reduced and for the amount of an estate exempt from taxation to be increased, from $675,000 currently to $1 million next year and to $3.5 million in 2009. In 2020, the tax will be repealed entirely.
- The bill addresses the “marriage penalty,” the quirk in the tax code that leads many two-income couples to pay higher tax bills than they would if they remained single. The main marriage penalty provisions, however, would not begin before 2005. Starting then, the bill would gradually increase the standard deduction for couples so that it becomes twice the level for single people. It would expand the 15 percent tax bracket for couple to cover twice the income level that the bracket covers for single filers.
- Contribution limits for 401(k) plans and others like them gradually rise to $15,000 from $10,500. Limits for contributions to individual retirement accounts go from $2,000 to $5,000.
- The bill allows up to $4,000 in college expenses to be deducted, subject to income limits. Congress would have to extend the provision in 2005 if it is to be continued.
- The bill also removes limits on the deductibility of student loan interest and increases the contribution limit for tax-advantage education saving accounts to $2,000 a year from $500.