Tax Cut May Get Us Spending Again

Don’t just sit there, do something. Frustrated that repeated cuts in interest rates have not stirred the slumping economy, President Bush and Congress are talking about stronger medicine--a cut in taxes.

Republicans are talking about cutting the capital gains rate and Democrats about tax relief for “the middle class.” The aim is to increase the investment gains or take home pay of consumers so that they’llhike their spending and bring joy to car dealers and store owners in a national election year. Consumer spending accounts for two-thirds of the U.S. economy--when it’s down, the economy is down too.

That’s why both the White House and Congress now seem eager to reopen last year’s budget agreement in order to divert money from the $291-billion defense budget to tax relief.

Don’t expect a windfall. The tax relief being talked about may put $400 in the average taxpayer’s pocket--just about enough to pay off some credit card debt and allow politicians to run for reelection saying they did something.

Meanwhile, they don’t seem to know what to do. The Bush Administration on Tuesday announced that federal regulators will ease their scrutiny of banks in an effort to stimulate new lending. “I want to ensure that we have sound banks making sound loans,” the President said. But the charge that banks are not lending because of tough regulation is as phony as professional wrestling.

The truth is the banks are broke, or they’re financing the federal deficit. Potential losses on bad real estate loans add up to more than the U.S. banking system’s underlying equity, according to Grant’s Interest Rate Observer newsletter.

Also, the Bush Administration two years ago suggested to banks that they hold back on real estate loans and put more money into U.S. Treasury securities. And they have. Commercial banks have increased their holdings of U.S. government bonds by $150 billion, or almost 50% in the past two years--helping to finance a federal deficit that has ballooned to more than $350 billion.

Banks are not lending to business because they’re lending to the government. Meanwhile the economy continues to lag--unemployment is at 6.7% nationally and more than that in Michigan, Massachusetts and California.

Fiscal stimulus, as the economists call tax relief, can be fast-acting. A reduction in capital gains taxes, from the current 28% rate, would encourage sales from stock and bond portfolios and get money moving. It would also spur business formation, but that’s a longer-term result.

To boost take-home pay, Sen. Albert Gore (D-Tenn.) and Rep. Tom Downey (D-N.Y.) have proposed increasing the child exemption, lowering withholding and putting more money in family paychecks. Rep. Dan Rostenkowski (D-Ill.), chairman of the House Ways and Means Committeee, and Sen. Lloyd Bentsen (D-Tex.), chairman of the Senate Finance Committee, say they have a plan for middle-class tax relief, but are keeping the details quiet for the moment.

Tax cuts are not a bad idea. The combination of cutting capital gains and withholding would spur both consumption and investment, says tax expert Mark Bloomfield of the American Council for Capital Formation.

But it won’t be a free lunch. Washington sources say Rostenkowski, head of Congress’ key tax-writing committee, is in no mood to allow tax cuts to increase the budget deficit. There will have to be offsetting revenues or spending cuts because the deficit has become dangerous. The interest burden on this year’s deficit alone will be about $30 billion; the annual interest on the total national debt is now about $210 billion.

So the handy solution will be the reduction in defense spending called the Peace Dividend. Right now, $40 billion in defense reductions are slated for the next five years. Those cuts will be accelerated.

But even so, we’re talking about a tax cut of $400 for each of the roughly 105 million tax returns filed. And those defense cuts are not the same as a pot of gold, notes a congressional staffer. They represent soldiers discharged from service, skilled workers laid off from defense firms and military contracts phased out.

The point is that public money has paid to train those people and to perfect the companies’ industrial skills. Public money will be needed now to help with the transition, to maintain those skills and do right by the people.

So the tax cut may not be large. Still, it could spur business. President Bush is right when he says “confidence” is needed to restore the economy. If he and Congress were to ask ordinary people what they want, the answers might be as simple as “create jobs so my son or daughter can move out of the house; make enough work to restore my full-time shift.”

If the White House and Congress act wisely, they can make tax cuts a reality, and actually do something for the voters at the start of 1992. Nothing is impossible.

Taxing Election Years Tax action in presidential election years hasn’t always cut taxes--1984 saw a tax hike. In the past five election years, the tax moves have been sometimes significant--and always interesting.

1972: No tax legislation, but President Richard M. Nixon promised federal action to ease the burden of property taxes--six years before Proposition 13 in his native state of California. Nixon won.

1976: Tax Act of 1976, signed by President Gerald R. Ford on Oct. 4, increased standard deductions and allowed tax credits for child care. Also curbed tax shelters in farming, oil and gas and motion picture investments. Ford lost.

1980: President Jimmy Carter opposed tax cuts called for by opponent Ronald Reagan. Carter later said he would cut taxes in 1981. He never got the chance; Reagan won and cut taxes in 1981.

1984: Deficit Reduction Act raised taxes $50 billion by restricting income averaging, hiking tax on interest income. Budget deficit was then about $180 billion. (It’s now near $400 billion.) Reagan was reelected.

1988: Technical corrections in tax code limited marital deduction on estate taxes, imposed tax on distributions from single-premium life insurance policies. George Bush won.