Tax-relief rhetoric is great disguise for scary policies

PHILIP MOELLER

October 30, 1991|By PHILIP MOELLER | PHILIP MOELLER,SUN BUSINESS EDITOR

Why let the facts ruin a good story?

Yesterday's report that the gross national product grew at a 2.4 percent rate in the third quarter -- the strongest sign yet of a recovery -- might not be enough to dampen congressional enthusiasm for a tax cut to "jump-start" the economy.

Given worries of an economic relapse in the fourth quarter (consumer confidence was abysmally low in October), I suppose it's even possible to discount yesterday's GNP report as old news.

Besides, both political parties are scared out of their perks these days that the voters will throw them out. Polls show the ailing economy is doing serious damage to President Bush's popularity. Congress needs no such outside help, having done itself in through silly abuses of power and, particularly in the Senate, appearing totally out of touch with the people, especially women.

So, there's a political stampede in Washington to blatantly curry voters' favor in the 1992 elections by lowering voters' tax bills -- whether or not it's in the national interest.

The Democrats' argument is that the economy is not getting better and that a good-sized tax cut would stimulate spending and also provide overdue relief for middle-income households.

The White House is not so keen on the need for a quickie tax cut. In fact, President Bush and his Cabinet-level advisers are warning against such a move in light of yesterday's GNP report.

However, Mr. Bush (and a group of Republicans who are ideological holdovers from the Reagan era) would dearly love to re-establish a low tax rate on investment profits, and are clearly eager to use any tax-relief momentum to achieve their investment-related goals.

And what of the towering budget deficit? Not to worry. The handful of major proposals articulated so far contain corresponding trims in current or future government outlays that would not worsen the deficit.

Describing lower taxes as a needed stimulant for today's ailing economy is good rhetoric but bad governance. Even moving at lightning pace, Congress would not enact tax cuts much before next spring.

If the cuts reduced individual tax withholding rates, most middle-class paychecks would rise by $10 or so a week. That's unlikely, by itself, to turn consumers into spending fools and revive the economy.

If the cuts take the form of tax credits, their lag effect would be much, much longer. Credits on 1992 income, even for early filers, wouldn't show up in refund checks until well into the spring of 1993. You could argue that taxpayers would start spending more money right away because they know they'll face a lower tax bill later. But this theory doesn't jibe with the way most of us deal with taxes.

The only way tax cuts could jump-start the economy would be if they were applied retroactively to 1991 income on tax returns due by next April 15.

But even if they could be enacted with a snap of the finger, it's hard to see what general economic good tax cuts would do if they're matched by federal spending reductions. Over time, it is true that private-sector spending generates more economic activity -- has a higher "multiplier" -- than government spending. But the difference is not that great, nor does it show up right away.

If government spending were not cut, then lower taxes would cause the deficit to rise. Unfortunately, any large increase in our already grotesque budget deficit would set off inflationary alarms in financial markets and lead to sharply higher interest rates. And although lower interest rates may not have sparked economic activity so far, it's equally clear that any substantial boost in rates would make the recession much, much worse.

Most economists, in fact, view deficits as the principal drag on economic recovery, not middle-class tax burdens. Economists, however, don't have to run for re-election.

Equally troubling, they don't have to deal with unrealistic public expectations -- nurtured by years of invisible deficit spending -- that government is a costless wonder that can give us anything we want.

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