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Not So Fast With That Tax Cut, Pardner


News: Analysis & Commentary: Washington

Not So Fast with That Tax Cut, Pardner

Neither the political backing nor the bucks may be there

During the Presidential race, George W. Bush portrayed his $1.6 trillion, 10-year tax cut as a long-term plan to gradually return a chunk of the projected budget surplus to taxpayers. His idea: Slowly phase in the cuts to track the rise in federal black ink.

That was before Bush and most of Washington fell into recession panic. Now, both the incoming President and congressional Democrats are looking to speed up that tax cut to get quick cash into the hands of wary consumers.

Sounds good in theory--but actually providing such recession insurance will be tough. A big countercyclical tax cut will run into serious political, economic, and budgetary problems. For starters, economists doubt it would work. There is no consensus on the details. And short-term budget surpluses are too small to pay for a big tax cut without touching Social Security reserves--a step both parties insist they oppose.

Such problems haven't stopped those economists who do believe in tax stimulus from arguing for a hefty cut to significantly boost consumer spending. "We need something like a $100 billion a year," figures Albert Wojnilower, economic consultant to Monitor Clipper Partners, an investment firm.

Right now, though, that money isn't available. The non-Social Security surplus in 2001 is expected to be $75 billion--too small for both a pump-priming tax cut and new spending Bush favors for education, defense, and other priorities. That's why he originally contemplated no tax cut at all for fiscal 2001 and only $21 billion for fiscal 2002.WHY WAIT? Nonetheless, a quick tax reduction is Washington's latest fad. Supply-siders say cut rates now, regardless of the fiscal consequences. Business wants fast tax breaks, too. "I'd be supportive of something that can be worked out in the near term as opposed to something that will take two years to get through Congress," says Michael C. Ruettgers, CEO of EMC Corp. And Democrats such as House Minority Leader Richard A. Gephardt are also embracing a stimulative tax cut. There's even talk of backdating it to Jan. 1, 2001.

But if many agree with the principle, there's little consensus on the best way to accelerate a tax reduction. While most economists doubt fiscal policy can fine-tune the economy, they agree that if the feds are going to use taxes, the best way is to trim rates. Bush campaigned on a plan to cut rates for all taxpayers by 2006. That would cost $125 billion annually. Now, he may try to speed up the rate cuts, although he would likely have to trim them for rich taxpayers.

In part, that's because Hill Democrats will never agree to big tax breaks for the wealthy. Instead, they would cut rates for working-class taxpayers and may add proposals for a more generous Earned Income Credit and a boost in the child credit--an idea candidate Bush embraced. But they'll likely insist on retaining some of the non-Social Security surplus for deficit reduction, thus blunting the impact of their tax cuts.

And what of Corporate America? It, too, backs rate cuts, but also wants some money to stimulate capital spending. Says James Y. Hunt, president of the Chantilly (Va.) technology consulting firm EYT Inc.: "Both corporate and personal tax relief need to be considered."TOO SLOW. Some execs would restore the Investment Tax Credit, an immediate write-off to offset the cost of new equipment. But that old Democratic idea isn't likely to get much support from the Bushies. More popular are proposals to speed up depreciation write-offs for capital equipment, especially high-tech gear. Also possible: tax breaks for the oil industry. But such ideas are both costly and complicated.

Another tack would be to provide relief from the marriage penalty and the estate tax--ideas that have broad bipartisan support. But neither would do much for the economy now.

If it continues to sour, chances for a big stimulative tax package grow. But if the slowdown seems modest, Bush and Congress will likely embrace a tax stimulus that's mostly symbolic. And that will leave the fine-tuning where most economists think it belongs--at the Fed.By Howard Gleckman and Rich Miller in Washington, with Ann Therese Palmer in Chicago and William Symonds in BostonReturn to top


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