Economy, War Not Separable

Times Staff Writer

President Bush is seeking to advance two seemingly disparate goals, calling on America to give itself a new tax cut even as it girds for war with Iraq.

In Tuesday's State of the Union address and in the budget he is expected to release next week, Bush is pursuing a strategy evident since the 2001 terrorist attacks -- one of trying to strictly separate the nation's economic issues from its national security concerns.

But the economy and war have not stayed in the distinct, hermetically sealed boxes as the president had hoped. As the prospect of conflict with Iraq has grown in recent weeks, the stock market and consumer confidence have tumbled, the value of the dollar has swooned and energy prices have climbed.

As a result, analysts say, Bush's success at influencing the economy in the coming months will have less to do with cutting the tax on stock dividends than with prosecuting a speedy and successful war.

"The president's economic policy is his Iraq policy," said David Gergen, a member of recent Republican and Democratic administrations, and a faculty member at Harvard University's Kennedy School of Government in Cambridge, Mass.

"Everything now depends on successfully resolving the Iraqi situation."

That hasn't stopped Bush from declaring that he is out to cure what ails the economy and to do it almost exclusively with tax breaks. Indeed, the administration quietly signaled Wednesday that it has more breaks in mind, beyond the $1.35-trillion tax cut enacted in 2001 and the $670-billion package of tax cuts that Bush unveiled this month.

Administration officials appear ready to insert a proposal in the 2004 budget they will release next week that would create new "lifetime savings accounts," in which people could save up to $7,500 a year tax-free, and would more than double to $7,500 the annual contribution limit for Roth individual retirement accounts.

The combination could prove popular with affluent Americans and might even be a moneymaker for the government in the short term. But critics say that it would eventually free most savings and investment income from taxation and, in the process, demolish a keystone of the nation's progressive tax system.

"Over time, more and more of the wealth of people who already have a lot of wealth gets shifted into accounts that are tax-free for the rest of their lives," said Robert Greenstein, executive director of the generally liberal Center for Budget and Policy Priorities, based in Washington.

With rare exception, presidents have raised taxes rather than lowered them in wartime to help defray the cost of combat, and imposed other restrictions, such as rationing or price controls.

By contrast, Bush signaled his intent Tuesday to stick with his two-track approach to growth and war, saying the country should cut taxes further to solve its economic problems despite the looming conflict with Iraq. He offered what White House officials clearly hope will become a tautology in the coming debate:

"Jobs are created when the economy grows," the president told Congress. "The economy grows when Americans have more money to spend and invest. The best and fairest way to make sure Americans have the money is not to tax it away in the first place."

In some respects, it is clear why Bush continues to push economic proposals that are trumped for now by his war plans. He wants to show he is ready to step in, as he did after Sept. 11, to offset some of the growth-dampening fears that war and the danger of further terrorist attacks could produce.

Politically, he wants to once again inoculate himself against the fate of his father, former President Bush, who fought a popular war with Iraq only to see his reelection hopes dashed by the perception he was out of touch with the pocketbook concerns of ordinary Americans.

And of course, if the U.S. strikes a decisive blow against Iraq, this president wants to have planted policy proposals that he can reap in the victory lap the country would almost certainly grant him in the aftermath of a battlefield win.

But analysts say there are other, less obvious motives behind the administration's two-track approach. In essence, Bush has continued to push tax cut-heavy economic proposals as a means of protecting his tax cut agenda from the charge it has been rendered unaffordable in the new, more dangerous world since Sept 11.

"They are intent on pursuing their old agenda of cutting taxes and shrinking government even with the war," said Thomas E. Mann, a government affairs expert with the Brookings Institution, a nonpartisan think tank in Washington.

The awkwardness of the administration's two-track approach has been apparent from the outset.

In a speech to a joint session of Congress after the attacks, Bush rallied the nation with a tough warning to terrorists. Then, in effect, he called on Americans to keep shopping.

"I ask you to live your lives.... I ask for your continued participation and confidence in the American economy," he said.

The White House's position has grown no easier in the intervening 16 months as polls show Americans increasingly skeptical about the need for tax cuts, and even sympathetic observers wonder about the clash of cuts with the president's call to arms.

"Does it make sense to ask the country to make a sacrifice to go to Iraq and simultaneously say we're going to give you a tax cut?" asked former Reagan administration economist C. Eugene Steuerele. "Is that what a call to common sacrifice means?"

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