Counting on a Tax Cut

The Business Roundtable, a lobbying group of chief-executive officers from large corporations, last week showed where along the political spectrum the debate over the next tax cut will take place when it found itself aligned with Democrats in advocating more relief to workers. Its unexpected position suggests even those paying close attention to the Bush administration proposal aren’t clear on the purpose of the tax cut.

The Roundtable’s position was news because the president’s plan, expected to be released in a few weeks, is said to lean heavily toward helping corporations and making the temporary cuts of a year ago permanent. The Roundtable instead proposed a one-year elimination of the Social Security payroll tax on the first $10,000 in wages, accelerating the marginal income tax-rate cuts passed in 2001 and eliminating the “double taxation” on dividends for individuals, a change, the Roundtable says, that “would provide a near-term stimulus by reducing taxes, providing an immediate increase in disposable income and encouraging investment in equities.” The approximate cost for these is $160 billion in 2003.

Low corporate tax rates, a substantial tax cut last year and the knowledge that more breaks in a Republican Congress are certain to arrive in the next two years helps explain the Roundtable’s consumer-oriented emphasis. But it is also derived from the idea that the cut would act as a stimulant, a short-term bump to jolt the economy into growing by putting money in consumers’ pockets.

The Roundtable is not alone in this thought – Democratic leaders and moderate Republicans fought last time to shift the tax break toward the middle class, the conservative Club for Growth says the next cut should help workers rather than corporations and Lawrence Lindsey, the director of the president National Economic Council, has suggested that people as well as corporations might benefit from a tax break. But the overall message from the Bush administration is not immediate cuts but a permanent change in tax rates. That is an idea worth debating but it is not a stimulus plan.

This confusion over what a reduction in taxes could and is targeted to achieve is made worse by discussions in Congress, the House in particular, of cutting government spending. If the economy needs stimulating, why cut spending? If inventories are backed up and manufacturing is operating well below capacity, reductions in government programs and tax-cut extensions that start eight years from now are unlikely to help. The debate on tax cuts has drifted so far toward the assumption that all tax cuts are helpful no matter where, when or how much that their advocates apparently no longer feels the need to make the case for any particular cut.

The Roundtable’s mistake was to assume that the government would cut taxes to achieve the immediate goal of helping the economy. Its members have no doubt since heard from colleagues that such a specific is an unnecessary burden.