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Why public misses downside of tax cuts

By David R. Francis / May 19, 2003



For months, Washington's inside-the-Beltway buzz has been about the second huge tax cut proposed by President Bush, and the variations thereof passed by the House May 9 and the Senate Thursday.

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Outside the capital, the attention span shrinks. Most Americans have a limited knowledge of economic theory and only a vague idea of the tax-cut details.

"I doubt if people pay much attention," says Charles Schultze, chief economist for President Carter from 1977 to 1981.

Most people understand that the tax cuts will increase the budget deficit. A New York Times/CBS News poll finds that 58 percent figure reducing the deficit would be a better way to improve the national economy. Only 31 percent say a tax cut would be better. And 58 percent figure the latest Bush-proposed tax cut won't make "a significant difference" for their tax burden.

Yet they seem to accept Mr. Bush's assurance that he will "deal with" an enlarged deficit. Some 67 percent approve of the job he's doing at the White House.

Meanwhile, the deficit grows.

The Congressional Budget Office figures the deficit will exceed $300 billion in the fiscal year ending Sept. 30. That doesn't reflect the tax bills before Congress. The House approved a $550 billion cut over 10 years. The Senate passed $350 billion over a decade. The White House may step in to settle their differences.

Other experts suggest the deficit could wind up close to $400 billion this year.

Congress plans to deal this week with a Treasury request for a $984 billion increase in the nation's $6.4 trillion debt limit to make room for further deficits.

Economists at Goldman Sachs, a major Wall Street firm, say US annual deficits could accumulate to more than $4 trillion over the next 10 years and have negative economic consequences. The report's title: "Budget Blues: Play It Again, Uncle Sam."

By now, most Americans probably also know that a large proportion of the tax savings will go to those already prosperous.

Last week, the Institute on Taxation and Economic Policy in Washington calculated that more than 50 percent of the tax-cut dollars in the Senate Finance Committee plan would go to the best-off 10 percent of all taxpayers in the first four years. The bottom 60 percent of taxpayers would get 11.9 percent, averaging about $100 a year. The top 1 percent: $41,117 a year.

Liberal groups have tried to rouse some indignation about this benefit split. Mock "millionaires" in tuxedos, supposedly cheering the cuts, rallied at the White House Correspondents Dinner last month.

But there has been no voter revolt.

One reason may be that taxes are "overly complicated," says Leonard Burman, an expert at the Urban Institute in Washington. Better newspapers do manage to carry tax-policy stories. Most people, however, get their news from television - and TV news largely ignores tax stories. "They don't make it as sound bites," he says.

Two months ago, Mr. Burman recalls, he was taped by a national network on a tax story. But it didn't air. "Too boring," he guesses. It was replaced by a segment on the disappointment of Sen. Hillary Clinton (D) of New York with the size of her office.

Perhaps voters are persuaded by Bush's argument that a tax cut is needed to stimulate the economy. He has said his originally proposed $726 billion cut would create 1.4 million jobs by the end of 2004.

But economists note that the modest economic growth now anticipated would probably add 1 million jobs in 18 months.

In Washington, the National Association of Manufacturers, the US Chamber of Commerce, and other business groups are pushing for the tax cut. A Tax Relief Coalition has been formed to support the Republican "jobs and growth" package.

Conservative think tanks, such as the CATO Institute and Heritage Foundation, back the cuts. The House package would add 828,000 jobs next year and an average 574,000 a year through 2008, Heritage economists calculate.

But ammunition for the opposition has been bubbling up from surprising places.

The International Monetary Fund, a multilateral institution, says the tax cuts would be poorly timed and probably unnecessary, while failing to confront the looming costs of Medicare and Social Security after the baby boomers retire.

A study this month by the Joint Committee on Taxation (JCT), the congressional body for estimating revenue effects, suggests the House-passed bill will produce a short-term boost to the economy, but will not generate the long-run economic gains promised by Bush. If anything, the tax cuts could eventually slow the economy slightly because the ballooning deficit reduces national savings.

Even "dynamic scoring," taking account of a tax cut's short-run stimulus effect, doesn't end the long-run deficit problem, the Congressional Budget Office found in a March report. That's a blow to "supply-side economists," who argue that tax cuts create almost enough new revenue to pay for themselves.

"There's nothing wrong with supply-side economics, if you divide the revenue benefits by 10," Mr. Schultze jokes.

Then the Committee for Economic Development, a group of 250 corporate leaders and educators, held that "deficits do matter," because they leave less money to finance plants and equipment, research and technology, and training.

Worse, Federal Reserve Chairman Alan Greenspan said big deficits raise interest rates. Bush still has said Mr. Greenspan will be reappointed as chairman next year.

Liberals, unable to save revenues for social programs, Social Security, or get more tax cuts for lower-income Americans, are frustrated.

The Republicans, complains Bob McIntyre, head of Citizens for Tax Justice, have "a great PR operation."

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