How partisan role reversals color the tax-cut debate
In Washington today, conservative Republicans sound like liberal Keynesians - cut taxes even more than the $1.6 trillion proposed by President Bush to stimulate the economy and save it from a recession.
And liberal Democrats are calling for fiscal conservatism. Let's be prudent, they say. The tax cut is too big. We're in danger of swinging back into federal red ink. Shrink the national debt instead.
It's a role reversal.
"Really strange for those of us who grew up in earlier days," says David Wyss, Standard & Poor's chief economist in New York.
There are more curiosities in this tax-cut debate. One is that the budget surplus could well be even larger than forecast last month by the White House - at least for a year or two. The Schwab Washington Research Group predicts the surplus in the fiscal year ending Sept. 30 will be $325 billion. That compares with the $284 billion in the Bush budget.
In fiscal 2002, the surplus will be $350 billion, not the $283 billion in the budget, says Greg Valliere, the group's chief strategist. That's an extra $108 billion in surplus.
"Fiscal policy is contractional. Washington has played a role in this economic downturn," says Mr. Valliere. His firm's budget numbers have been more accurate in recent years than the government's.
So, in the eyes of devotees of John Maynard Keynes, the late British economist who advocated using fiscal policy to counter the Great Depression of the 1930s, a tax cut would be appropriate right now.
But, again curiously, the $960 billion cut in taxes just passed by the House does virtually nothing to boost the economy now. The only cut retroactive to the start of this year is for the very lowest tax bracket. That saves $5.6 billion in 2001 - or $20 a head. "Have a good time," jokes Mr. Wyss.
By 2002, when this tax cut does kick in, the economy should be out of the slowdown. Lower taxes could then boost the economy when it doesn't need a shove.
One simple fix, suggests Wyss, would be to include the child allowance that is part of the Bush plan in Phase 1 of the tax bill and make it retroactive to Jan. 1. That would kick in some income for families most in need of tax relief.
Another curiosity in the Bush tax-cut plan is its structure. Most economists figure that a cut giving more money to lower- and middle-income households would stimulate the economy more rapidly than one whose prime beneficiaries are the rich. The rich tend to save; those with less income might spend more of their tax cut.
Bush administration economists argue that extra savings of the rich would pay off in a more robust economy in the long run through more capital spending in new and bigger businesses.
Peter Orszag isn't so sure. The University of California, Berkeley, economist has calculated that the Bush tax cut would boost gross domestic product - the nation's output of goods and services - by 0.4 to 0.5 percent by 2012, a modest amount. But the reduction in national savings as a result of a lower federal-budget surplus would trim GDP by 0.6 to 0.9 percent. So the net effect would be slightly negative.
All such calculations of the long-term effects of tax policy changes, as Mr. Orszag admits, involve "great uncertainty."
Economists at the conservative Heritage Foundation argue that the $1.6 trillion Bush tax cut would so stimulate the economy that it would only cost $1 trillion because revenues would grow.
Orszag says such calculations don't take the impact of reduced federal surpluses into account.
Whatever, the Bush regime should have its fingers crossed that the stock market recovers. Wyss estimates 15 percent of federal tax revenue is coming from the market. These revenues come from taxes on capital gains, on withdrawals from 401(k) or similar plans, and on the profitable exercise of stock options.
California's entire budget surplus last year, notes Wyss, was accounted for by capital gains and option exercises at Cisco Systems alone.
If stock prices remain glum, Washington's surplus could fade after perhaps three years.
Wyss has a response to the Republican mantra that "the surplus is ours and should be paid back." If so, he says, the federal debt "belongs to our grandchildren." Nice.
(c) Copyright 2001. The Christian Science Monitor