A Steep Price for Tax Cuts

On Christmas Eve, the Treasury Department asked Congress for a little present, requesting that it raise the government’s $6.4-trillion debt limit as soon as possible or risk a default in late February. Congress had already raised the limit last June, by $450 billion. President Bush seems undaunted, continuing to follow in President Reagan’s footsteps. No amount of tweaking his tax policies can change their domination by permanent tax cuts that will boost the federal deficit more quickly than a sluggish economy could.

On Tuesday before the Economic Club of Chicago, Bush is expected to announce a number of proposals in addition to the 10-year, $1.35-trillion tax cut passed by Congress in 2001. Sensibly, and in response to critics, the administration is contemplating $100 billion in direct aid to the states over 10 years. Bush has indicated that he will back an extension of temporary federal unemployment benefits, another immediate spur to the economy. The administration also hopes to accelerate the already approved income tax reductions and create some business investment credits.

The centerpiece of its plan, however, will be a steep cut in the tax on stock dividends, intended to lift the stock market. While there’s a decent argument that the tax on dividends should be cut, the context of a $1.35-trillion existing tax cut is everything. The cost of the dividend tax reduction, according to the Urban-Brookings Tax Policy Center, will range from $142 billion to $248 billion over the next 10 years. Though good for stockholders, this is costly and unlikely to put money quickly into the hands of consumers. The best course that the administration could pursue would be to at least delay some of the expensive, permanent tax cuts skewed toward the wealthiest taxpayers, while backing short-term cuts and tax credits. Sen. Joseph I. Lieberman (D-Conn.) has, for instance, called for a number of modest and temporary tax credits, including one for boosting information technology.

The administration contends that its sweeping tax cuts alone can revive the economy and that deficits are largely irrelevant. R. Glenn Hubbard, chairman of the White House’s Council of Economic Advisors, dismisses as “nonsense” and “Rubinomics” the view that high deficits matter and lead to stagnation. But when President Clinton’s Treasury secretary, Robert E. Rubin, wiped out the deficit left behind by Reagan, he allowed Federal Reserve Chairman Alan Greenspan to lower interest rates and free up more capital for investment. The result was encouragement of low unemployment, low inflation and steady growth.

In contrast, Bush’s trickle-down package threatens to swamp the economy in a wave of debt. And that’s before taking into account the huge but unknowable cost of preparing for and perhaps fighting a war with Iraq. The White House’s tax-cutting yet free-spending ways defy history, and taxpayers will be the ones left responsible for decades to come.