TAX CUTS THAT WORK

Success at war gave President Bush a powerful voice this week when he demanded the Senate support larger tax cuts. But no matter how loudly he insists that his version of cutting taxes is just what the economy needs, analyses from several sources quietly refute his assertions.

A Rose Garden ceremony Tuesday was just the start of the latest push by the president to seem engaged in the economic problems of the nation and

to get his way, or much of his way, with a dividend tax cut. He begins this campaign a few days after the Senate, with a supporting vote by Vice President Dick Cheney, agreed to a much smaller tax cut. The Senate’s $350 billion, 10-year tax cut, compared with the House’s $550 billion cut, also came with a promise from Senate Finance Committee Chairman Charles Grassley that he would allow no larger package to come from the House-Senate conference. This agreement was needed to persuade Sens. Olympia Snowe and George Voinovich of Ohio to support the proposed budget resolution. Without such an agreement, it is worth noting, any tax cut subsequently would have required 60 votes to pass and therefore could have ended up at zero.

The president described what remains of his tax cut as relief “so that people who want to find a job can find one, so that people looking for work are able to put food on the table for their families.” The nonpartisan Congressional Budget Office sees it differently. It concludes the president’s budget would produce a total deficit of $1.82 trillion over the next decade. David Wyss, chief economist for Standard & Poor’s DRI added, “If the federal government is borrowing more money, that’s less money for the rest of us to borrow, and that means higher interest rates,” which makes business expansion and job growth more expensive. The Center on Budget and Policy Priorities reached the same conclusion. Mark Zandi of Economy.com looked at the ability of the tax cut to boost the economy over the next year or two and concluded, “We’re heading in the wrong direction.”

Economy.com outlined the most effective means of stimulating the economy and measured proposals by how much they cost the Treasury vs. how much they are likely to increase spending. Unsurprisingly, the plan to eliminate the tax on corporate dividends was one of the least effective. The most effective got money into the hands of working- and middle-class people quickly, so they would spend it soon. Some ways to do this are included in the president’s plan, such as accelerating plans to increase the child tax credit. Others were not in his package but should have been, such as fiscal relief to the states, which both of Maine’s senators have proposed. Extending unemployment benefits beyond May is another. These would nicely fit under the $350 billion cap.

How the president will pressure Sens. Grassley, Snowe, Voinovich and others to break their promises and support a tax cut above $350 billion is not clear. One possibility had the most popular pieces of the tax cut – the small business expensing or the child tax credit – taken up separately and then passing the full $350 billion with part of the dividend tax cut, although Democrats would be able to block that maneuver. The White House should avoid the temptation to make this into a contest of wills and focus instead on finding an agreed-upon strategy for stimulating the economy without running up the deficit.

The president can do that under the level set by the Senate and declare victory, which is a more productive strategy than insisting on a tax cut that creates deficits for years to come.