Greenspan Tepid on Bush Tax Cut

Federal Reserve Chairman Alan Greenspan put a damper on President Bush’s drive for new tax cuts Tuesday, saying he supported the president’s proposals but only under conditions the White House seems certain to reject.

Greenspan’s embrace of Bush’s 2001 tax cuts was considered pivotal to their passage, so his less-than-enthusiastic endorsement of the latest proposal was taken as fresh evidence that the new White House plan is in political trouble.

Greenspan insisted in congressional testimony that he favored Bush’s call for eliminating the personal tax on stock dividends, but only if the measure were “revenue neutral” instead of resulting in a $385-billion loss.

The Fed chairman also said he backed the president’s effort to permanently extend the 2001 cuts, which are scheduled to “sunset” at the end of the decade. But he tempered his support with a call for new restrictions, including sunset provisions, on any proposal that threatens to boost the federal deficit.

By the administration’s own estimates, the extension would cost Washington more than half a trillion dollars in revenue in its first three years alone.

“At best, he damned the idea of a new round of tax cuts with faint praise,” said David M. Jones, a Denver economic consultant and longtime Fed watcher.

Greenspan’s comments come at a crucial moment for the administration as war with Iraq appears to draw closer and even such Bush loyalists as House Majority Leader Tom DeLay (R-Texas) warn that the president has yet to sell his own party on key elements of the tax-cut plan.

“It’s not opposition,” DeLay said of GOP reaction to the dividend tax cut. “ ‘Concern’ is the word we’re using.”

The political punch in Greenspan’s assessment was apparent minutes after he began to speak Tuesday.

Democrats rushed out news releases citing his warnings about burgeoning deficits as reason to reject the new tax cuts, while some Republicans lashed out at the Fed chairman with uncharacteristic venom.

“Your words matter ... maybe more than they should,” said Sen. Jim Bunning (R-Ky.). “You have been in this town for a long time. Some might say too long.”

The White House is pushing three big tax-cut plans that its own estimates show would carry a 10-year price tag of $1.46 trillion.

Among them: a “growth package” that includes the dividend tax cut and is designed to revive the sputtering economy; an extension of the 2001 cuts; and a set of new savings and retirement accounts that the administration says would have little effect on the budget but that critics charge would cost hundreds of billions of dollars.

Taken together with the already approved 2001 cuts, which carried a $1.35-trillion price tag, the new measures would make Bush one of the most aggressive tax cutters in modern times, rivaling even President Reagan.

Greenspan’s tepid embrace of the new cuts is based at least in part on his belief that already approved tax reductions and the Fed’s own aggressive paring of interest rates have given the economy everything it needs to bounce back.

“I’m one of the few people who still are not ... convinced that stimulus is a desirable policy at this particular point,” he told the Senate Banking Committee.

But the Fed chairman seemed unconvinced by his own arguments that a robust recovery is around the corner. And a report that accompanied his congressional testimony showed that the central bank has trimmed its growth forecast for 2003 and has concluded that there will be no improvement in unemployment this year.

About the best hope that Greenspan could muster Tuesday was that once “geopolitical risks” -- the prospect of war with Iraq and the threat of more terror attacks -- are removed, central bank officials will be able to better gauge the economy’s condition.

“We should be able to tell far better whether we are dealing with an economy poised to grow more rapidly, or one that is laboring under persisting strains and imbalances,” he told lawmakers.

In the end, Greenspan’s doubts about the White House proposals appear to have less to do with his views about the economy than with worries that the measures would send the deficit spiraling out of control.

Although the Fed chairman carefully hedged his comments about the dividend tax cut and the president’s call for extending the 2001 cuts, he directly attacked two key elements of the White House’s argument for its measures: that deficits don’t have an effect on interest rates or the economy, and that a return of strong growth can erase deficits.

On deficits, he commented, “Contrary to what some have said,” an increase in the deficit “does affect long-term interest rates. It does have a negative impact on the economy.”

On growth, he said, “Faster economic growth is not likely to be the full solution to currently projected ... deficits.”

The administration appeared to already have begun reshaping the case for its new tax cuts in response to Greenspan.

In an interview late Tuesday, Treasury Secretary John W. Snow said he shared the Fed chairman’s skepticism about policies designed primarily to provide short-term stimulus.

“Stimulus suggests some Keynesian notion of going out there and pumping up the economy on a short-term basis,” Snow told reporters. “I wouldn’t support that.”

Snow said he preferred to characterize Bush’s tax packages as “genuine tax reform” that would have both an immediate and a long-term payoff.

Times staff writer Warren Vieth contributed to this report.