Tax Cuts Seen as Spoiler--in Boom Times

Until recently, the cardinal rule of American politics was: When in doubt, cut taxes. So why, with the presidential campaign finally underway in earnest this week, are the candidates making so little headway in selling their tax cut plans to the voters?

The easy answer is that economic good times have dulled voters’ senses, lifting their living standards and lowering their interest in saving on taxes.

But recent interviews suggest that, far from being fat, happy and unconcerned, a large swath of the electorate--and a fair number of economists--worry that this is a particularly bad time for cutting taxes.

“The last thing we need right now is a big tax cut,” because it will overheat the economy, declared Steven A. Roach, chief economist of Morgan Stanley Dean Witter & Co., the big New York investment house.

Such views could work a special hardship on Republican nominee George W. Bush, whose tax cut plan--with its 10-year, $1.3-trillion price tag--is by far the larger of the two candidates’ proposals. Yet they could also prove a problem for Democrat Al Gore, whose $500-billion tax cut package is a key element of his campaign but one that has yet to attract much attention.

“Tax cuts don’t have the political salience they once did, and, if that continues, they are not going to be much help to either candidate,” said Karlyn Bowman, a polling expert at the American Enterprise Institute, a conservative Washington think tank.

Evidence of a huge change in attitudes on taxes can be found in the poll numbers. Where once a vast majority of Americans wanted cuts and were ready to revolt to get them, now only a relatively small fraction do.

A Gallup poll the year before Reagan’s 1980 election, for example, found that 62% of those surveyed agreed that Washington “ought to cut taxes even if it means putting off some important things that need to be done.” When Gallup asked the same question last year, only 21% agreed.

A series of Los Angeles Times polls this year shows that voters by almost a 3-to-1 margin prefer use of government surpluses for such programs as Social Security, Medicare and debt reduction rather than tax cuts.

Worries About the Good Times

As much as anything else, the source of the about-face on taxes appears to be worries about the current boom.

Chief among the worries: whether the good times will continue; whether the surpluses will keep rolling in and whether, even if they do, Washington will have enough to stay in the black when the baby boomers start retiring and drawing down Social Security and Medicare.

“The nation is in great fiscal shape now, but that doesn’t mean we’re going to be in great shape by the second decade of the 21st century,” said Robert D. Reischauer, president of the liberal Urban Institute in Washington. “We’re going to have a tough time providing those retirement benefits.”

Will the good times continue?

The chief argument for virtually every tax cut of the last 40 years--especially the Reagan cuts of the early 1980s and the Kennedy cuts of the early 1960s--was that it would either get the economy moving or keep it moving.

But with the current boom now in its 10th year, there is no need to get anything moving.

And as for keeping things moving, virtually all economists think that what’s most needed--a cooling of the economy--is the very opposite of what a tax cut would deliver.

“This is exactly the wrong time to cut taxes; it will overstimulate the economy,” said Owain Evans, a London-based executive of Merrill Lynch & Co. Evans recently polled 33 major investment fund managers and found almost three-quarters believe this is a “bad time” to cut taxes or increase spending.

“It would be a killer blow if the Fed had to come back in and counteract a stimulus” by raising interest rates beyond what it has already done, he said.

Bush and his advisors have reacted to these criticisms by recasting their arguments. The GOP nominee has largely dropped claims that cuts could serve as an “insurance policy” against a slowdown and instead focused on such goals as helping poor working families enter the middle class.

In doing so, Bush has been able to highlight one of the key elements of his proposal, namely that in percentage terms the largest cuts would go to people at the bottom, not the top, of the nation’s economic pile, a surprise from a party with a reputation for favoring the rich.

But the GOP nominee has yet to get much political hay out of that fact, and for good reason, according to analysts.

The poor people who would most benefit already pay almost no taxes and so have little reason to notice. Meanwhile, what most of the rest of the nation sees is that in dollar terms the rich still get an inordinate share of money.

In contrast with Bush, Gore has so far managed to sidestep the debate over whether tax cuts are bad for the boom largely by arguing that his tax plan is modest by comparison with his rival’s.

Will the surpluses last?

Washington has run a surplus only seven times since World War II, and two of those times were last year and this. So it may not be surprising that the country is still groping for what to do with the excess.

But an interesting pattern has already emerged. While polls suggest that much of the public doesn’t believe that the surplus even exists, the presidential candidates are behaving as if every cent that is projected for the next decade will materialize.

“The public seems to be much more skeptical than the politicians about what we can afford,” said Alan J. Auerbach, an economist and director of the Birch Center on Tax Policy at UC Berkeley.

Voters Are Seen as Closer to Truth

The truth probably lies somewhere in the middle. But a recent paper by Auerbach and William G. Gale, an economist at the centrist Brookings Institution think tank in Washington, suggests that it is likely closer to where the voters, rather than the candidates, think it is.

The two economists started with the Congressional Budget Office’s most recent surplus estimate of $2.2 trillion over the next 10 years.

They subtracted the amounts that Medicare and federal pensions contribute, on the grounds that no president or Congress would dare divert these funds. They sought to correct for CBO’s unrealistic assumption that spending on routine government operations will remain at current levels for a decade. And they ended up with a 10-year number of only $350 billion.

That’s not enough to cover either Bush’s or Gore’s tax cuts, let alone the new spending that each has advocated for such things as a prescription drug benefit or a military buildup.

Even if the two economists’ estimates turn out to be off the mark, say analysts, their calculations suggest how uncertain the estimates are on which the candidates are relying and what a reach their proposals may well be.

“There is an unbelievable amount of arrogance in a political system that gives policymakers the right to commit every bit of a projected surplus for the next 10 years,” said Reischauer, the Urban Institute president. “Where’s it written that politicians have to come up with plans that spend every last cent?”

* SHIFT FOR BUSH

George W. Bush turns to foreign policy, underlining the importance of Latin America. A10

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Comparing Tax Cuts

Bush would give almost everybody a break, with a large fraction going to the rich. Gore would target breaks. making health, child care and education cheaper for some but doing your taxes more complicated.