There is nothing wrong with tax cuts that give the struggling a break, reward and encourage savings and investment or boost a sagging economy. But really lavish tax cuts -- especially during the costly uncertainties of wartime -- can be defended only with the discredited voodoo of supply-side economics.
If taxes are deeply cut, the theory goes, wealthy people invest their windfall, businesses thrive and jobs are created. Then, new tax revenue generated by this prosperity, even at lower rates, more than makes up for the original tax reductions and can even pull the federal government out of its deficit. Unfortunately this is poppycock, as the federal deficits that piled up during Ronald Reagan's presidency attest.
The Congressional Budget Office, even using guidelines demanded by Republicans, could not find any supply-side miracle in President Bush's proposed additional $725 billion in cuts over the next decade -- what Bush calls "my economic growth and job creation program." In fact, the budget office reported, the deficit would balloon to more than $1 trillion over the next five years, even generously counting the economic stimulation the tax cuts would generate. As economists warn, swiftly rising deficits encourage higher interest rates, which would put added pressure on a struggling economy.
The folly is multiplied by the unknowns that face the nation -- a stagnant economy, the war in Iraq and the potential for new terrorist attacks in the United States. Bush asked Congress this week for a supplemental appropriation of $75 billion, mostly to finance the war but also to bolster security at home. It is probably just a down payment.
A worried bipartisan group of senators was able to whittle down the proposed tax break to $350 billion on Tuesday, sending Bush loyalists huddling to plot a new strategy. The House version of the federal budget still contains the full $725-billion tax cut, and its devotees may be looking toward a Senate-House conference to regain the full amount. No argument will be able to take into account the cost of war, because it is at this point unknowable. How much will the United Nations offer, and in what form? That's completely up in the air.
As Federal Reserve Chairman Alan Greenspan said in February as war loomed, it's uncertainty, not a lack of fiscal stimulus, that is stalling the economy. This uncertainty means that even $350 billion more in tax cuts, on top of last year's $1.35 trillion in cuts, is too much right now.
One GOP fallback is to reduce the dividend tax by half, rather than eliminate it altogether, as Bush asked. Democrats would like to shift more of the cuts to the middle class.
The best course right now, however, is no course. Simply delay any decision until the growing debts of war are known. Make a decision on the basis of knowledge, not wishes.