Tax-Cut Caveats

THE debate in Washington over tax breaks and economic stimuli is heavily political - and perhaps academic to boot. To have the desired impact on a balky economy, the tax proposals would have to be quickly implemented. The outlook for that is clouded at best.Considering the distance between Republicans and Democrats on such matters as how to pay for a tax cut for the middle class and the value of a reduction in the capital-gains tax, a compromise package isn't likely to emerge before April. But the political stakes in the race toward an economic-stimulation package are rising even as the runners are slowed by partisan elbowing. President Bush has promised to announce such a package in his Jan. 28 State of the Union address. It will probably contain some combination of tax cuts for the average citizen and tax incentives for investors and businesses. The capital-gains reduction will figure prominently. Both parties are trying to position themselves to ride, simultaneously, the tax "fairness" issue - with cuts for the middle class, whose financial well being has declined in recent years - and the economic growth issue. A number of Democrats, including some presidential contenders, favor some variation of capital-gains tax cut, for instance. The danger in the rush to legislate a cure for the economy is adverse timing. A modest, temporary tax cut, putting a few hundred extra dollars into the hands of taxpayers, would probably have more symbolic value than economic effect. People are more likely to save it or pay debts than make a big purchase. A substantial, permanent cut could work against the long-term economic health of the United States by adding to the federal deficit. All the discussion of tax adjustments has a short-term negative impact as well. The bond market is made uneasy by the prospect of deficit growth and its impact on interest rates, while investors may opt to sit on their hands awaiting the politicians' decision. Many economists see a recovery getting better established by next spring in any case. Before making any changes in the tax code or undoing last year's budget agreement, decisionmakers in Washington should be sure their horizons stretch beyond November of '92.

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