Taxes: Rebate and Switch - Brief Article

After weeks of flailing, Democrats have found a criticism of President Bush's tax plan that works. It does too little, they say, to stimulate a slumping economy. They're right. Bush's tax cuts would be phased in quite slowly, so most of the relief would occur long after any recession was over. That's the reason the president's economic advisers profess agnosticism about whether the tax cut will help the economy this year-even as Bush travels around the country telling crowds that the tax cut is necessary precisely to help the economy.

The Democrats' alternative is an immediate tax rebate that would return $60 billion of this year's surplus to taxpayers. This plan, however, would not stimulate the economy either. It would give consumers more money to spend. But consumer spending is not the problem with today's economy: Such spending has been rising. It's investment that has been declining, and a rebate would do nothing to stop that decline. Cutting tax rates, on the other hand, would increase incentives to work, save, and invest.

The weakness of the economy argues for accelerating Bush's tax cut. Republicans have feared to propose a faster tax cut because a faster one would be a bigger one, and a bigger one would be vulnerable to the charge of threatening Medicare. Specifically, the government would have to dip into the Medicare trust fund in 2003 and 2005 in order to finance a bigger tax cut-if, that is, you believe in Washington's make- believe budget projections. And in a Medicare trust fund that is more than an accounting fiction.

This is no way to make economic policy. But no matter how dubious the Medicare argument is, there is no doubt that Democrats would make it loudly if given the chance. Luckily, Republicans have several options to avoid this trap. They could, for example, add a provision to the tax bill cutting capital-gains taxes. That's worth doing on economic grounds: It would, among other things, provide immediate help to the stock market. The history of capital-gains revenues suggests that a rate cut would also raise money for the federal government, as even the official budget estimators agree. Or Republicans could cut spending. Or they could delay the implementation of those Bush tax cuts that do not promote growth (such as the doubling of the tax credit for children).

Or-the boldest option-Republicans could propose to cut tax rates now, but for only two years. When such a tax cut expired in 2003, would Congress really refuse to extend it-and, in effect, raise taxes?

Which options Republicans choose is less important than that they stand for effective, pro-growth tax cuts. The rebate proposal is a diversion. But it has let the Democrats, for a time, talk about cutting taxes more and faster than Bush. They are trying, in a sense, to get to Bush's right on taxes. He can't let them stay there.

COPYRIGHT 2001 National Review, Inc.
COPYRIGHT 2001 Gale Group