Big Tax Cut Still Makes No Sense

One of the significant things that Wall Street guru Robert E. Rubin did as President Clinton’s economic advisor and then as Treasury secretary was talk his boss out of implementing the lavish spending programs promised during Clinton’s first presidential campaign. Budget discipline, said Rubin, had to come first at a time of overwhelming federal deficits. The deficits turned into surpluses as the economy expanded under Rubin’s plan, fueling a long boom.

Paul H. O’Neill, the Treasury secretary-designate of the incoming administration, would do well to have a similar frank talk with President-elect George W. Bush about his plan for an across-the-board tax cut that would cost at least $1.3 trillion over 10 years.

Bush is keenly aware that just as governments can reap political dividends from an economic boom, they pay dearly in a downturn. Political motives were clearly behind Vice President-elect Dick Cheney’s recent dire warnings that we are on the “front edge” of a recession. Such statements could be used later to pin blame for any economic slowdown on the Clinton administration. They also serve as justification for Bush’s enormous tax cut plan. This is not to say that smaller cuts would not be useful, including a $250-billion removal of the marriage penalty, for which there is bipartisan support. It could be adopted quickly, providing a timely jolt to the economy and to swooning stock markets.

Although investment bankers fret about recession, other reputable economists believe that the economy can slow to a soft landing. They think that the economy is reacting to a series of Federal Reserve interest rate increases, which have brought short-term rates to a decade high, and that it will level out in response to coming rate decreases. A too-large tax cut aimed at stimulating the economy would work against the Fed’s efforts to fine-tune and thus could usher in a period of even higher interest rates.

True, the current revenue surplus is huge and, partly because of the continuing sell-off on Wall Street and the resultant capital gains, may be even bigger this year. But better to pay down the national debt. Committing to a large tax cut would put Bush at odds with Fed Chairman Alan Greenspan, a believer in debt reduction. Moreover, the surplus that Bush intends to spend could evaporate as quickly as it appeared. The independent Center on Budget and Policy Priorities calculates that, with the spending increases of recent years and rising Medicare costs and defense and farm spending, Bush’s tax cut would turn surpluses into deficits.

Bush has a point in arguing that taxpayers’ money is not safe in the hands of a spendthrift Congress, and this may justify smaller, targeted tax cuts. That would leave him room for new spending programs for which there is bipartisan support, including education and Medicare payments for prescription drugs. His enormous across-the-board tax cut, however, is just as unjustifiable today as it was when he first proposed it.