Proceed With Tax Cuts to Lessen Recession Pain

The chorus sung by pundits and political insiders since George W. Bush became the president-elect is: Forget the tax cut. They argue that Bush has no mandate for his tax-cut proposals, which they say only help the rich. Commentators and members of both political parties, especially Democrats, have advised the president-elect to put divisive issues aside and move forward those items on his agenda that enjoy universal support, like education reform.

However, market forces are not concerned with political sensitivities. Facing the prospect of a slowing economy, now is the time for a good-sized tax cut. Bush should pursue his plan without delay.

Bush’s proposal centers on across-the-board cuts of the income-tax rate. During the campaign, the Bush plan was a lightning rod to opponents, who cited the plan’s cost of $1.3 trillion over 10 years. That figure comes from a static analysis of the tax cut, which presumes people won’t work harder and therefore offset some of the decreased revenue. In reality, because of the tax cuts, people will work harder and produce more, including tax revenue, so that the reduction in government coffers from the cuts will be less than projected.

Bush should quickly go after tax cuts that will have immediate impact on the economy, such as chopping capital gains taxes and abolishing the inheritance tax. He should not abandon the income-tax rate cuts even though they probably won’t go into effect until January 2002.

If unemployment remained in the 3% to 4% range, large tax cuts would not be necessary to stimulate the economy. Yet even the Federal Reserve Board now has acknowledged the possibility of a recession. Why wait for it to come? Tax cuts could stave off a recession by stimulating the economy. Cuts to the income-tax rate, even if they don’t take hold until 2002, can help escalate the recovery from a recession.

Stopping or softening a recession means more than economic forecasts and gross national product. It means saving people’s jobs.

This is the right time in the economic cycle to cut taxes. Tax revenue has grown faster than national income for eight years. Taxes as a percentage of the GDP have moved to a historic high of 20.4%. Compare that to taxes equal to 19% of the GDP during the high tax period just before Ronald Reagan took office.

Bush’s tax-cut proposal contains four tax rates, the lowest being 10%. Currently, there are five income-tax rates; the lowest is 15%. Bush would create a top rate of 33%. The current top rate is 39.6%. Bush’s tax cuts would only partially offset the tax increases of the last five years.

Under the current tax structure, millions of middle-class Americans are moving into higher tax brackets as real income grows. This so-called bracket creep partly explains the bursting federal treasury.

But families are facing increased costs in essential commodities, such as electricity and natural gas. In turn, increases in these power sources are increasing the cost of common consumer products, such as milk. Tax cuts cannot happen fast enough to help people pay these increased costs. The promise of tax cuts to come could revive the sense of economic optimism that Americans have been living with for years.

Taxpayers in the lower tax brackets have been increasing their own debt for some time. The Bush proposal would cut their taxes by about one-third, helping them to manage that debt.

It is true that upper-income taxpayers will see healthy cuts under the Bush plan, but they are the people who pay most of the taxes. They also are the group in which the greatest economic stimulation would occur.

George W. Bush has stated that he still intends to seek his proposed tax cuts despite the calls for him to stop. Besides having good economic reasons, he has a strong political reason to stay the course.

Bush remembers well the backlash against his father, who seemed to forget his own memorable campaign promise: “Read my lips. No new taxes.”

Don’t expect another Bush family tax campaign promise to be abandoned so readily.