One more reason a tax cut is not the right move now

August 25, 1999|By Robert Reno

WE'VE finally heard the best-put argument why cutting taxes now is not only politically dubious, but also economically insane.

It goes like this: If we do it the stock market might crash. Case closed, I guess. Anybody really want to test what would happen if a large tax cut triggers fear of an overheated economy touching off higher inflation rates and a more restrictive monetary policy? It's a blueprint for a grizzly of a bear market that would make 1987 look like a minor correction.

This is not the ravings of a pro-government big spender who wants to preserve the federal surplus so it can be squandered on social programs. It is, rather, the considered view of the famous Henry Kaufman, perhaps the most influential voice in the history of modern Wall Street.

Prisoners of Wall Street

And even if you dismiss Mr. Kaufman as an overrated proverbial scold and self-fulfilling prophet, something few people do, his warnings tell us the alarming degree to which we have all -- even the 52 percent of households that don't own any stock -- become prisoners of this wretched market in which so many of us have such a paltry share.

We can wring our hands about its being overvalued, fret about the perils of day trading and, above all, despair that at a time when it is so easy to make money legally, stock fraud, slippery trading and schemes to milk innocent investors are more common than ever. But in the end this market owns us more than we own it.

Back in the '60s, '70s and even the '80s, when the Dow Jones industrial average crept up at more normal rates, and was even flat for years at a time, it was easy to argue that the stock market wasn't the economy, that there were many other far more important indicators of the nation's economic health.

Growing market share

Indeed, from 1960 through 1965, an earlier period of exceptionally strong growth and low inflation, the Dow advanced from 618 to 910, nothing to match its performance in the 1990s. But since 1989 the stock-owning class has expanded robustly, going from 31.7 percent of households to 48 percent in the latest survey.

Mr. Kaufman flatly declares: "At no time in the post-World War II period have the level and direction of the U.S. stock market had such a critical influence on the American economy and the rest of the world as now." His message: Don't mess with it.

Mr. Kaufman's landmark warning, written for the Washington Post, is sobering. So is his view that "it is irresponsible to jeopardize the most favorable set of influences on the stock market in American history by abandoning fiscal policy discipline."

His warning is fine as far as it goes. But it doesn't tell us what will happen and how we can save ourselves when this Bengal tiger of a market we have mounted gets hungry and wants to eat us. It's a historical fact that no boom has lasted forever and many have crashed spectacularly.

Will the greatest bull market in history and the most prosperous boom in the experience of living Americans necessarily be followed by a correction or contraction of similar magnitude? I suspect Mr. Kaufman is saying: Maybe not, but surely and sooner if we lose our heads and go for some flea-bitten dog of a tax cut.

All the other arguments against a big tax cut are convincing enough in themselves. In the form proposed by the present conservative Congress, the $792 billion in tax cuts are simply larded with too many special favors to selected industries.

This is one reason why they would provide savings of a few cents a day for many lower income families while reducing the annual liabilities of six-figure income households by the price of a small yacht.

In any event, the United States already enjoys some of the lowest taxes in the industrial world it competes with. It is hardly a nation groaning under the weight of public sector expenditure.

About 31.7 percent of the U.S. gross domestic product goes to taxes -- local, state and federal. This compares with 37 percent in Canada, 47 percent in France, 44 percent in Germany and 55 percent in Sweden. None of these are wretched, uneducated, poverty-ridden, unhappy or particularly riot-torn places. End of case.

Robert Reno is a Newsday columnist.

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