Sunday January 14, 8:35 am Eastern Time
Analysis: Bush Tax Cut Idea Gains Support
By Caren Bohan
WASHINGTON (Reuters) - Private economists, many of whom were initially skeptical of
the need for sweeping U.S. tax cuts, are now warming to the idea, saying a fiscal shot in the
arm in fact may be what the economy needs.
President-elect George W. Bush made his proposal for a 10-year $1.3 trillion tax cut the centerpiece of his campaign.
However, the idea did not catch fire with many U.S. voters who supported using growing budget surpluses to pay down the
national debt and shore up Social Security.
Economists, meanwhile, were worried during late 1999 and most of 2000 that a big tax cut might overstimulate the booming
economy and force the Federal Reserve to raise interest rates.
But with the U.S. economic boom fading rapidly, many analysts say a tax cut could be just what the doctor ordered.
``Fiscal activism has not been prominent on the plate for a long time because of budget deficits,'' said Roger Kubarych,
economist at the Council on Foreign Relations. ``This may be the opportunity to bring it out.''
In part to fend off criticism that big tax cuts would gobble up the U.S. budget surplus, Bush had proposed phasing in reductions
in income tax rates over several years.
But his chief economic adviser, Lawrence Lindsey, has hinted that with the economy in trouble, Bush may push for an
accelerated timetable for the cuts.
A CHANGING CLIMATE
Budding support among economists is just one indication of the change in the climate surrounding tax cuts.
Congressional Democrats, who just weeks ago were vowing to oppose broad tax cuts, have signaled they want to compromise,
``I think we can work out a compromise where everybody gets some of what they want,'' House Democratic Leader Richard
Gephardt said earlier this month. ``I don't know the exact size. It may be that it has to get bigger because the recession is
looming and we've got economic worries out there.''
Bush's Republican allies in Congress are themselves seizing on the prospect of a stepped-up timetable, with House Majority
Leader Dick Armey urging a tax cut retroactive to Jan. 1.
The ``Keynesian'' principle of using fiscal policy to stimulate the economy was discarded years ago by many economists of both
Republican and Democratic leanings.
Many see Fed interest-rate cuts as a more powerful and effective means of reviving a slowing economy.
Last week the U.S. central bank embarked on such an effort, cutting the key fed funds rate by half-percentage point in a
surprise inter-meeting move on Jan. 3. That cut is expected to be followed by more, with several analysts eyeing a potential
half-point cut at the Fed's next meeting on Jan. 30-31.
The argument against fiscal policy measures is it is not as nimble as monetary policy. Tax-cut proposals get bogged down in
legislative debate and often come too late to be useful.
``I would agree with just about every economist that the Fed is a more potent means for stimulating the economy,'' said Greg
Valliere, managing director at Schwab Washington Research. ``But if Congress could get a tax cut passed early and make it
retroactive, it could really help.''
That sentiment was echoed by Brookings economist Robert Litan, a Democrat. ``If Bush were to send up a package designed
specifically to keep the economy out of recession, he could make a case for Congress to pass it by July 1.''
Glenn Hubbard, a Columbia University economist who has been advising the Bush team, said the main goal of the
president-elect's proposal is using tax changes to improve the economy's long-run health, not short-term fiscal stimulus.
``The tax cuts would provide increased incentives for work and savings,'' he said. He said tax policy generally has not been
successful at timing the business cycle but if tax cuts could be enacted quickly, all the better.
One economist whose opinion could have a big impact on the tax cut's prospects will be Fed Chairman Alan Greenspan. The
Senate Budget Committee has invited him to testify in late January or early February but no hearing date has been set.
Many economists believe that Greenspan, who during the campaign cautioned that budget surpluses should be used for debt
reduction, will alter his views and back the cuts.
A GROWING PILE OF CASH
The budget surpluses piling up in Washington coffers are adding fuel to the momentum for tax cuts.
Later this month, the Congressional Budget Office is expected to ratchet up its 10-year forecast to as much as $6 trillion from
the previous estimate of $4.6 trillion.
Litan said an income-tax cut would be a good idea if Bush structured it differently from the way he has proposed, focusing more
of the cuts on the lower- and middle-income brackets and reducing the extent of the cut in the top tax bracket. That would
make it more palatable to Democrats and would also make it less costly.
Voters are jumping on to the tax-cut bandwagon, too. A new Zogby poll, released on Wednesday, showed 53 percent of
voters supported the proposed tax cut, compared to 34 percent who opposed it and 13 percent who weren't sure.
Some economists remained doubtful, though.
Economist Mark Zandi of Economy.com, said even on an accelerated timetable, the brunt of the tax cut will hit mid-year and it
is possible the economy might already be on the upswing by then. ``It may actually take effect at just the wrong time for the
economy,'' he said. |
