Time for a Tax Cut? Fed Chief and Wall St. Say No

Wall Street usually thinks tax cuts are a great idea. But not so with the $792-billion cut approved by the U.S. House on Thursday.

The stock market closed broadly lower Friday, and Treasury bond yields rose.

The House wants to give Americans a 10% across-the-board tax cut and reduce the top capital gains tax rate from 20% to 15%.

President Clinton has vowed to veto the measure, assuming it gets through the Senate, which is iffy.

Federal Reserve Chairman Alan Greenspan, testifying before the House Banking Committee on Thursday about the economy and Fed policy, lucidly explained why he--and probably much of Wall Street--believes a tax cut is ill-advised.

If the federal government continues to run a budget surplus, Greenspan said, it should be used to continue to pay down the national debt, not cut taxes. Why? For one thing, Greenspan said, debt reduction could help keep long-term interest rates down by limiting the Treasury’s need to borrow.

More important, the Fed chief said, the U.S. economy simply doesn’t need a tax cut now. Consumer spending hardly needs an added boost, and Wall Street’s bull market hasn’t exactly been impeded by the 20% capital gains tax rate.

Save your ammunition, Greenspan counseled the House. “Human nature being what it is, eventually something is going to happen” to end the economic boom, he said. And at that point, the economy will need the stimulus that a tax cut could provide, he said.

Though apparently to no avail, he also reminded the House that every dollar of debt reduction today is effectively an increase in the Treasury’s future capacity to borrow--which might well be needed later in the next decade should the economy slow, or as aging baby boomers begin to retire and draw Social Security.