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Bush envisions a kinder, gentler April 15

GOP election triumph buoys prospect of tax overhaul to stimulate economic growth.

By David R. FrancisStaff writer of The Christian Science Monitor / November 14, 2002



With the economy still sluggish and the Bush administration enjoying new political vigor, more tax cuts are likely to be put forward in coming months as a way to stimulate jobs and growth.

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Both the US House and Senate will be under Republican control in January. Some Democratic lawmakers support tax relief. These developments enhance the president's hopes of making his 2001 tax cuts permanent and enacting new tax rollbacks. Mr. Bush is even expected to push, in the long-term, for a sweeping overhaul of the US tax code.

Alongside the war on terrorism, these combined efforts could prove to be the signature of his presidency. But they are not without political peril.

The American public is divided on the issue. Moreover, further tax cuts risk ballooning the federal deficit to an embarrassing, and perhaps economically damaging, level. Four years of surpluses in the federal budget have been wiped out by a combination of the $1.35 trillion tax cut won by President Bush last year, the economic downturn, the stock-market bust, and stepped-up federal spending.

Yet tax cuts clearly have political momentum, given Bush's election gains and a rekindling of the supply-side economic views of Ronald Reagan from the 1980s within White House circles. Deficits are no longer viewed as a killer of low interest rates.

Bush is arguing, in effect, that the more you cut taxes, the more jobs are created and the more the economy grows.

Economic research has cast doubt on that theory, including whether the tax cuts enacted in 2001 have had much positive impact on the economy.

But yesterday, Federal Reserve Chairman Alan Greenspan said the 2001 "tax cuts and extended unemployment insurance provided a timely boost to disposable income" for tired consumers. He said repealing those tax cuts might hurt markets, but that further tax breaks may not be needed as a short-term stimulus.

Deficits: not a problem?

If tax cuts are now likely, rising deficits appear even more certain.

In fiscal 2002, which ended Sept. 30, the deficit reached $159 billion. This year, it could move up to $200 billion - even more if a war in Iraq proves costly.

Some fiscally conservative legislators, both Republican and Democratic, are unhappy with this development. The old idea of saving the surplus in Social Security tax revenues has faded.

Spending, on everything from homeland defense to healthcare, is on the rise.

But supply-side economists say not to worry. "We ought to be running deficits of 3 to 4 percent of GDP to stimulate growth," says Lawrence Kudlow, a consulting economist in New York.

At the moment, the deficit stands at about 1.5 percent of the nation's output of goods and services. That's a level that most economists regard as reasonable and sustainable for years.

But Mr. Greenspan has recently warned that returning to "continuous large deficits would risk returning to an era of high interest rates, [low] investment, and slower growth in productivity."

Liberal economists say Republican-style tax cuts unwisely feed most of their benefits to the already well-to-do. Many would rather use federal dollars to shore up Social Security.

"We have almost squandered that opportunity" to avert cuts in programs for the elderly, says Richard Kogan, an economist at the Center on Budget and Policy Priorities in Washington.

Possible Bush moves

Bush has not spelled out what specific tax cuts he will seek.

One clear goal will be to make permanent the 2001 income-tax cut and estate-tax repeal, which are scheduled to expire in 2010.

Other discussed measures would benefit investors. They might be allowed to deduct $8,000 of losses in their stock portfolios against ordinary income instead of $3,000. The levy on capital gains might be cut again. The taxation of corporate dividends might be ended, or at least the rate might be cut. Depreciation of business assets could be sped up, helping profits.

Employees could be allowed to set aside more earnings tax free in their 401(k) or IRA plans.

Such steps, it is argued, would lift stock market prices, brighten the national mood, and encourage capital spending. Some economists argue that tax cuts will stimulate the economy sufficiently that the hit to government revenues will be smaller than anticipated.

But a recent study by Alan Auerbach, an economist at the University of California, Berkeley, suggests that "feedback" did not overcome the loss of revenues from the 2001 tax cut. The tax cut ate into national savings.

Another National Bureau of Economic Research study, by University of Michigan economists Matthew Shapiro and Joel Slemrod, finds that last year's tax rebate didn't do much to stimulate the economy in the short run. Households didn't spend much of their tax savings.

Over the longer run, the Bush team is considering major tax-code changes. The personal income tax would be replaced, except for those with high incomes, by the kind of national sales tax common in Europe.

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