The Misguided Tax-Cut Auction


October 30, 1991|By BILL GRADISON

WASHINGTON — Washington. -- The bidding for tax cuts in the 102nd Congress has started. Senator Bentsen, Chairman of the Senate Finance Committee, has opened with a $72 billion tax-cut plan. Senator ++ Gramm has gone $18 billion higher. Before the rest of us join the auction, we should reflect on whether the country can afford for anyone to win.

The facts are:

* The proposals are schizophrenic. Incentives to boost consumption with a tax cut conflict with proposals to boost saving by expanding Individual Retirement Accounts and cutting taxes on capital gains. The incentives to consume are designed to speed economic recovery from the recession; the incentives to save are aimed at increasing long-term growth. You can't increase and decrease national saving at the same time.

* It's too late to boost recovery. The 1990-1991 recession is over. The recovery may be weak, but it is under way. By the time an income-tax cut affects consumer demand, the recovery will be roughly a year old. By then, stimulus not only will be unnecessary, but will threaten sustained, non-inflationary economic growth.

* It's imprudent to institute saving incentives now. The recovery is lagging partly because consumers are reducing their debt and are reluctant to increase spending. We don't yet know whether this indicates a permanent shift away from consumption toward more private saving (and therefore more investment in plant and equipment). But if the shift is permanent, the need for saving incentives is reduced. It makes sense to wait and see.

* The proposals increase the deficit. Senator Bentsen's proposal is to be financed largely out of defense cuts. Yet, substantial defense savings are already incorporated into our budget plans, and they are not even big enough to keep the deficit from rising. They certainty cannot finance a tax cut. Similarly, proposals to boost economic growth through tax incentives for saving reduce revenues, swell the deficit, and increase the government's claim on credit markets -- a policy that slows long-term growth.

The lead time on fiscal policy is simply too long for us to try to engage in budget manipulations aimed at offsetting the effects of the recession. Inevitably, we wind up acting well after the time that our actions are most appropriate. It might, of course, be argued that we should still avoid fiscal contraction at this point in the business cycle, but even if we immediately focus all our efforts on deficit reduction, the results would come too late to harm the economic recovery.

At the same time, saving incentives are too weak and uncertain for us to boost long-term economic growth through the tax code. What we can do for growth is reduce the deficit -- a stronger and more reliable means of increasing long-term growth than any tax incentive available to us.

Breaking the budget agreement -- which most of the tax-cut plans do -- would send precisely the wrong signal to credit markets. The inevitable result would be higher interest rates at the very time we want to encourage investment. The budget agreement isn't perfect, but without it we can expect higher federal borrowing and higher interest rates.

Acknowledging these facts probably won't stop the auction. But they will help us understand what we are bidding so furiously to purchase. It's not faster economic growth, but a bigger deficit, lower national savings and slower growth in our standard of living.

Rep. Bill Gradison, R-Ohio, sent this letter to the members of the House of Representatives.

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