The battle over taxes is now joined. President Bush unveiled his bold, and expensive, tax cut and economic benefits plan Tuesday, estimated to cost $674 billion over the next 10 years. The Democrats have countered with a more modest, one-time $136 billion shot in the arm for the economy. The Democrats have posited that the Bush plan aims too much of its benefits at the wealthy.
It’s clear that Bush decided he had to respond to Democratic accusations that his plan–which, among other things, speeds up reductions in marginal tax rates and eliminates taxes on corporate dividends–would primarily benefit the rich. He did that fairly effectively in his speech in Chicago. His “re-employment accounts” for those who are out of work, accelerated child-care tax credits and reduction in the marriage tax penalty are all aimed at middle-class families.
In terms of long-range tax policy, there is much to like in Bush’s plan. Eliminating the double taxation of corporate dividends would be a boost for investment in equities. You can praise or damn Bush’s proposed acceleration of tax rate cuts, speed-up of child credits and permanent end to the estate tax. But those moves would have one enduring benefit: Taxpayers would know the rules and could make solid, long-term decisions accordingly, rather than wondering which currently scheduled tax law changes Congress will or won’t make permanent in future years.
The problem is that Bush’s effort to blunt the anticipated criticism pushed up the overall cost of his package in his effort to widely spread the benefits. It has become too ambitious.
Approval of a plan on the order of $674 billion must put pressure on Bush to keep a lid on federal spending. Don’t expect the Democrats–or many Republicans–to apply that pressure.
The White House shows little concern that its package could send the nation back on a course of runaway budget deficits. Bush can’t blithely ignore Washington’s propensity to spend, and then spend some more. Returning to the chronic deficit spending of the late 1980s isn’t acceptable.
The Washington Post reported this week that the White House will insist on holding the line on discretionary spending, outside of defense and homeland security. That’s good. Bush’s fiscal discipline will be immediately tested as Congress confronts the 10 spending bills to fund the government through September that it failed to pass before adjourning last year.
The federal government returned to budget surpluses in 1998, in part because it showed some spending restraint. But far more important was the tax revenue generated by the longest peacetime economic expansion in U.S. history.
The White House and Congress have to be realistic. The federal government has already fallen back into deficits–justified, perhaps in the short run, by the unexpected costs of homeland defense. They can’t, however, assume they will see a return to the kind of robust and sustained growth enjoyed in the 1990s. If they approve a deep reduction in federal revenues through ambitious tax cuts, they also have to put strict, long-term curbs on federal spending. Anything else will return the nation to a long pattern of growing deficits, and that will be reckless.
