Hold Off on a Tax Cut

DEMOCRATS are worried about big losses in Congress after this fall's elections. President Clinton's political fortunes seem shaky. What to do? How about raising the prospect of a tax cut for the middle class in 1995? It appeals to voters. It could help shore up reelection prospects for Democrats. And it fulfills a 1992 presidential campaign promise.

The idea is making the rounds with some of Clinton's advisers, and it is alluring. But Mr. Clinton should avoid it - at least for now.

Typically, administrations have used tax cuts as an antirecession measure; they can boost consumer spending, which accounts for about two-thirds of US economic activity, to stimulate economic growth - as well as political prospects.

Although the US economy's growth rate is slowing, it is not yet clear that a recession will result. In an attempt to keep inflation rates low while avoiding a recession, the Federal Reserve Board has raised interest rates five times so far this year. Many Fed watchers expect one more increase before 1995 (after the election). In effect, the Fed has been trying to fine-tune the economy. The Fed's rationale: Keeping the lid on inflation and settling for more-modest, yet more durable growth is preferable to the boom-bust cycle of faster growth rates and deeper recessions. The latest evidence of success on the inflation front came Tuesday, when the the US Labor Department reported that consumer prices rose a modest 0.3 percent in August. That translates into a 2.9 percent figure for the first eight months of 1994 (annualized, after seasonal adjustments). The consumer-price inflation rate for all of 1993 was 2.7 percent. Meanwhile, the economy is expected to grow at a rate of 3.6 percent this year, after inflation.

The Fed's record for fine-tuning hasn't been spectacular. Hence the desire of the president and Congress to have the tax-cut arrow in their economic-policy quiver. Yet for Clinton to raise anew the issue of a middle-class tax cut in the face of last year's budget agreement is to promise a tax increase (or, perhaps, revenue enhancements?) for someone else to avoid adding to the federal budget deficit. The net stimulative effect would be close to zero. One can imagine Clinton gathering some Republican support for the tax cut if he chose to offset it with spending cuts. In the absence of such spending cuts, moderate-to-conservative Democrats likely would join forces with Republicans to hoot a revenue-neutral tax cut off the floor, if it ever got there. They would be justified in seeing it as purely political. Indeed, even mentioning the notion now as a prospect for the 1995 legislative year indicates that the president is trying to polish the image of Democrats.

Save the tax cut for an economy truly in need of one.

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