Tax Cut Idea is Turning Into Political Hot Potato

Economists don't think it will help economy; Democrats support it as way to give middle-class families relief

THE tax-cut bidding war launched a week ago on Capitol Hill is viewed by nearly all economists and many members of Congress as early electioneering more than sound economic policy.But the result may mean that taxes come down next year. A tax cut enacted this year is unlikely, though not impossible, according to several close observers of tax politics. But several factors are driving toward a tax-cut bill next year. If one emerges, it may be an amalgam of Democratic proposals to cut taxes on middle-class families and Republican proposals to cut taxes on investment income. "It will include, in typical Washington form, most of what both parties want," says Stuart Eizenstat, a Washington lawyer and former domestic-issues director in the Carter White House. Whether taxes are cut, and how, depends largely on how long the economy remains in recession. Although the tax-cut ideas are promoted as ways to wake up the dormant economic recovery, there is little to support the notion that any kind of tax cut will speed the end of the slump. The tax-cut talk appeared to be a factor in a stock market dip this week and declining prices on federal bonds. The concern among investors is that lower taxes mean a higher federal deficit, and the deficit damage outweighs the spending and investing unleashed by a tax cut. Michael Andrews, a director in the Washington office of Saloman Brothers, says that although President Bush is promoting a capital-gains-tax cut, it must be "the last thing he would want to actually happen right now." "To propose this [any of the proposals] with a straight face as a stimulus to get us out of the recession requires an enormous amount of self-discipline," jibes Norman Ornstein, resident scholar at the American Enterprise Institute, who is writing a book on tax policy. The political currents pushing the tax-cut fury are strong ones. The president needs to free himself from charges that he cares only about foreign affairs while the economy stagnates. The Democrats view this as a good chance to win back the favor of middle-class families, who have seen only slight growth in incomes since the mid-1970s.

Economy still sluggish The economy refuses to show any consistent signs of improvement. A Federal Reserve Board report midweek found the economy weak or growing slightly all over the country. The lingering character of the recession has weakened the two arguments the White House makes - that the recession is already in recovery and that any government action would kick in too slowly to counter the slump cycle. A Washington Post poll last week brought the picture a little closer to the president's door. His job approval by the public is still remarkably high at 65 percent. Yet a slim majority, 51 percent, said the country needed a new president to set the country in a new direction. Seventy percent said Mr. Bush spends too much time on foreign problems and not enough on domestic. Nearly half, 48 percent, said he cares most about the problems of the upper-income people. His staff began last week to shave a few d ays off of upcoming trips that have the president out of the country most of the next month. In the past two weeks, President Bush has gathered top officials in his administration and party to discuss a possible new push for a growth package. Establishment conservatives, such as Treasury Secretary Nicholas Brady, reportedly are resisting any new moves that may do more harm than good. More populist conservatives, such as Housing and Urban Development Secretary Jack Kemp, are promoting stronger action. Sen. Lloyd Bentsen (D) of Texas then launched the tax-cut sweepstakes a week ago Sunday with a proposal to grant family tax credits of $300 per child and expand the exemptions for Individual Retirement Accounts (IRAs). He would make up the $72 billion cost over the next five years with defense cuts.

Republicans: capital-gains cut The main Republican answer has come from Sen. Phil Gramm of Texas and Rep. Newt Gingrich of Georgia. They propose a tax cut on capital gains from the present 28 percent rate to 19.6 percent, payable only after adjusting the gain for inflation. The Gramm-Gingrich proposal would also expand IRAs and grant first-time homebuyer credits to families with less-than-average incomes. Most of the direct benefits of capital-gains tax cuts go to the wealthy, and leaders in both parties are operating in the shadow of last year's budget battle, when the Republicans suffered in the polls from breaking Bush's no-new-tax pledge and holding up the deal over a surtax on million-dollar incomes. "You won't end the recession by giving the top 1 percent in this country a $12,000 tax cut," said House majority leader Richard Gephardt (D) of Missouri in a statement responding to the Gramm-Gingrich bill. But a tax cut for the middle class would generate growth by restoring purchasing power, he suggested. Republicans counter that most people with capital gains only have sky-high incomes in the year they cashed in a business or sold their family home. Further, they argue, lowering taxes on investment income creates middle-class jobs. In the end, says one GOP aide on Capitol Hill, the Democrats will argue in favor of redistributing incomes over growth. The Democrats will call it fairness in contrast to a growth that added little to the incomes of ordinary families in the 1980s.