FOCUS Bush has 'short-term defeat' on tax cut, still likely to claim win

WASHINGTON (AFX) - The Senate's reduction of President George W Bush's proposed 1.6 trln usd tax cut over ten years is a short-term defeat, but analysts said he may still claim victory.	    "I think it's a major defeat for Bush (but) it's a short-term defeat," said Joe Lieber, political analyst at the independent Washington Analysis group.	    The Senate earlier passed a budget resolution, which establishes a non-binding outline for taxes and spending, that reduced the tax cut to 1.289 trln usd, according to a Senate majority leader spokesman.	    "The President got an awful lot of what he wants (and) it looks like we're still on course to get an awful lot of his tax cut," said Clint Stretch, tax analyst at Deloitte and Touche in Washington.	    Analysts who spoke to AFX News said the ultimate tax cut is likely to be between 1.2 trln usd and 1.4 trln, over ten years. Most analysts thought it unlikely the final package will be approved before the August Congressional recess, but more likely in the fall.	    Lieber predicted that "Bush will (then) stand in the Rose Garden and say 'it's my bill' (that got passed)." 	    The next step is for the House of Representatives, which passed an outline including Bush's 1.6 trln usd plan, and the Senate, to agree to a final non-binding outline.	    This will present another opportunity for the administration to increase the size of the tax cut. Although the budget resolution is non-binding, it is seen as setting the parameters for later tax and spending legislation.	    Treasury Secretary Paul O'Neill said in a statement "I look forward to Congress working out a final resolution that embraces the principles of the President's tax plan."	    "The bottomline is...still a big victory" for the administration, said Ethan Siegal, analyst at the Washington Exchange.	    Analysts noted that 15 Senate Democrats joined all 50 Republicans in supporting the outline, which provided a larger tax cut than the 750 bln usd proposed by Democrat leaders.	    Larger battles are likely to be fought over the composition of the ultimate tax cut, analysts said, and Bush's proposals are likely to be significantly changed before being enacted.	    How much the Bush administration will ultimately be able to extract from the original proposal will depend in part on perceptions of influence in the Senate, they said.	    "Now all the question is who loses (in the public's mind)," Stretch said. Siegal said "it's really about who's in charge...if (Senate Democrat leader) Tom Daschle can spin this as a defeat, (it will be a setback for Bush)."	    Lieber suggested that the current stand-off between the U.S. and China may help Bush, because the defeat of his 1.6 trln usd plan may not receive as much media attention as it otherwise would.	    He warned, however, that the defeat "shows the vulnerability of the Republicans." 	    Three moderate Republicans joined all but one Democrat in cutting the tax plan. 	    Analysts said Bush's proposal to reduce the top marginal income tax rate to 33 pct from 33.6 pct is unlikely to pass, while his proposed elimination of the inheritance estate tax is also likely to be scaled back.	    "I still think it's possible to get a major capital gains tax cut," in the final package, Lieber said. 	    Stretch said Bush's plan to make a business research and development tax cut permanent could also be dropped. 	    Meanwhile, Senators have begun proposing separate tax bills that may become part of the final bill. 	    Senate Finance Committee chairman Charles Grassley today proposed a bill to increase tax credits on private retirement accounts, without specifying the cost in lost revenue.	    Analysts downplayed the impact the tax cut will have on the economy this year. 	    James Lucier, senior analyst at Prudential Washington Research Group, said: "Under any scenario, Democrat or Republican, with rate cuts or rebates, there is zero fiscal stimulus in the short-term."	    Democrats have proposed using 60 bln usd in this year's expected budget surplus to fund "rebate" checks to all taxpayers as an immediate stimulus.	    While the Bush administration has supported the idea of a short-term stimulus, it has preferred "front loading" its proposed marginal income tax rates, analysts noted.

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