Bush's first test: selling a tax cut

It's deja vu all over again: A Republican president-elect comes to Washington and insists that big tax reductions will be a priority just as soon as his Democratic predecessor leaves town.

In 1980, such a tax-cut-first philosophy paid large political dividends for Ronald Reagan, at least in his first 100 days. The Democratic-controlled House, far from fighting, engaged him in a bidding war to see who could gift-wrap the sweetest rollbacks for voters.

But today's fiscal context is as different from 1980 as George W. Bush's Texas twang is from Reagan's Hollywood-smooth manner.

The most obvious change is the state of the economy. Twenty years ago, memories of stagflation were fresh, and Democratic handling of the economy was to a certain extent discredited. Today? How many ways can you say "eight years of good times?"

Then there's the rise of the Federal Reserve's prestige. Big tax cuts are delayed hammers in their effects on the economy. The Fed's interest-rate changes, by contrast, are relatively fast and flexible. Many in the capital now look to Fed Chairman Alan Greenspan for fiscal cues.

This doesn't mean Mr. Bush's proposed $1.3 trillion tax cut is doomed - far from it. But it does mean that his marketing job will be tougher than Reagan's. And it means Mr. Greenspan could be key to determining its future.

Asked after their Monday breakfast meeting if the Fed chairman had endorsed his sweeping reductions, Bush said he would let the legendary central banker speak for himself.

"One of the things I'm certain that I should not do as president-elect is to try to put words in the mouth of Alan Greenspan," said Bush.

The size and scope of Bush's tax plan is already shaping up as one of the president-elect's most fateful first policy decisions.

Across-the-board cuts totalling $1.3 trillion over 10 years were one of the centerpieces of the Bush campaign. But in the wake of the long, controversial struggle over Florida's electoral votes and the presidency itself, many in Washington assumed that the near-run nature of Bush's victory would result in a more modest initial policy agenda.

House Speaker Dennis Hastert (R) of Illinois said that wrapping tax cuts in one big package, as opposed to separating them into such components as a repeal of the estate tax, would put the focus on dollar figures instead of benefits. Senate minority leader Tom Daschle (D) of South Dakota warned that nothing "would divide the nation more quickly, right off the bat" than for Bush to press for a full $1.3 trillion tax package.

But the Bush team shows no sign of softening its tax proposal.

"I think the case is more solid today than it was a year ago," said Bush Monday.

Justifying a big tax cut by pointing to recent indications that the economy is slowing down could be a risky political move, according to some analysts.

For one thing, it's not clear how much fiscal stimulus a big cut would deliver to the economy as a whole - or when. The dollars of tax relief in Bush's plan would be spread out over a decade.

Nowadays many economists believe the effects of any such major change in fiscal government policy are unpredictable.

"By the time [a] tax cut or spending increase typically has an impact, the problem it was intended to deal with very likely no longer exists," writes Stan Collender, a Fleishman-Hillard budget expert, in a recent National Journal analysis.

Furthermore, claims Mr. Collender, it is not yet clear that anything really bad is happening to the economy. While last quarter's 2.4 percent growth in gross domestic product is slower than has been typical in recent years, it is far from a recession, which is caused by GDP shrinkage.

With his eye on keeping the economy on track for a soft slowdown, as opposed to a crash, Fed Chairman Greenspan has in the past said he opposed sweeping tax cuts such as the Bush team has proposed. His preferred emphasis: use the government surplus to pay off the nation's debt.

That may not be Greenspan's final answer, though. Other analysts point to an array of political and economic reasons why the Fed chairman might fall in line with Bush's plan - perhaps bringing crucial votes in the Congress with him.

First, Greenspan is not known for insensitivity to Washington's political winds. In 1993, for instance, he cautiously endorsed President Clinton's economic stimulus package, despite the fact that it contained spending increases many Republicans had thought he would oppose.

Second, he has also said that while he thinks paying down the US debt should be a priority, tax reductions are sometimes preferable to spending hikes.

And the surplus has already loosened congressional pursestrings - the just-completed budget deal was $15 billion more expensive than even Mr. Clinton had asked for.

"I'm of the opinion that the surpluses won't linger, so I'd rather see them go to the taxpayers than to government spending," says Cynthia Latta, chief US economist at Standard & Poor's DRI in Lexington, Mass.

Third, Greenspan may believe the economy needs the boost in confidence a tax cut might bring. While GDP figures remain in the black, stock market reverses have cost investors $1 trillion in wealth in recent months.

"That's why we're starting to see consumer sales fall ... I think Bush ought to announce immediately that tax cuts will be the number one priority in the first 100 days," says Stephen Moore, president of the Club for Growth.

(c) Copyright 2000. The Christian Science Publishing Society