Walk Away From Tax Cuts

President Bush needs an exit strategy for his economic plan. On Monday, economists led by 10 Nobel laureates assailed his proposed tax cuts. On Tuesday, Federal Reserve Chairman Alan Greenspan ambushed the administration by reminding Congress of facts that it doesn’t take a doctorate to know. Bush needs to admit that he’s whipped on this one and regroup.

As the plan stands, the administration is pushing for a variety of tax cuts and shelters. For starters, it wants to make the 2001 tax cut permanent. Then it would eliminate the tax on individual dividend income -- the key part of the 10-year, $695-billion cut. Finally, the administration wants to create lifetime savings accounts and retirement savings accounts, which would basically remove investment income from taxation. The result would be trillions in deficits.

Greenspan suggested that the apparently impending war with Iraq, not a lack of fiscal stimulus, is what’s holding up the economy. As long as the administration hasn’t reached a decision on war and the costs remain unclear, businesses are going to be reluctant to invest, no matter how many goodies Bush tries to hand out. What’s more, the tax cuts themselves are likely to hurt, not help, the economy over the long run. Greenspan warned that long-term interest rates would go up if the budget deficit soared into the stratosphere and Washington needed to soak up money to finance trillions in debt.

Yup. The faster the administration drives the country into debt, the more it imperils an economic recovery. The deficit could be more than $300 billion in the next year, and that doesn’t even include the unknown costs of a war with Iraq.

After Greenspan’s appearance, the administration’s new Treasury secretary, John W. Snow, claimed that tax cuts would pay for themselves through a surge in economic activity. But moderates in Congress don’t seem to be buying into such wishful thinking, which didn’t work during the Reagan era and is unlikely to be any more successful today.

Instead, they’re listening to Greenspan. He said that no new tax cuts should be contemplated until the issue of Iraq had been settled.

Sen. George Voinovich (R-Ohio), who supported the first tax cut, in 2001, is alarmed by the projection of deficits and says it’s a good idea to wait until after the showdown with Saddam Hussein to consider more cuts. Sen. John W. Warner (R-Va.) also is taking a wait-and-see approach.

If Bush wants to engage in nation-building at home as well as abroad, he needs to retreat, at least temporarily, from sweeping tax cuts.