Tax cut revisited as red ink returns

It was 1982, Year 2 of the Ronald Reagan tax cut. Republican Sen. Bob Dole, watching federal budget deficits grow like Kansas wheat, urged his colleagues to pass a measure that essentially undid much of the cut they had approved the year before.

"Call it a tax increase, call it a tax reform bill, call it anything you want," said Mr. Dole. "But vote for it because it is good policy."

In the end, it was euphemistically called a "mid-course correction," but Congress did repeal about 45 percent of the tax cut.

Twenty years later, Washington is playing back this scene - or at least some are trying to. Yesterday, Sen. Ted Kennedy became the first Democrat to put out a specific plan calling for postponement of part of the Bush tax cut. He wants $350 billion - nearly one-third of the 10-year, $1.3 trillion cut - put off.

His call escalates what is already the dominant divide between the two parties at the moment in Washington - taxes. Part of the clash is purely political: early maneuvering for the 2002 elections. But part of it is rooted in one of the most fundamental philosophical differences between two parties of the past two decades: The Republicans' belief that tax cuts spur growth, and the Democrat's belief that deficits retard growth, by pushing up interest rates, and limit what can be spent on "important" programs.

Lawmakers like Mr. Kennedy are worried, in particular, about the later years of the Bush tax cut. The war and recession may make this year's deficit unavoidable. Their professed concern is the money that will be needed to fund programs like Social Security or some future prescription-drug plan.

While many of these arguments echo those of the Reagan years, even some economists who support delaying the tax cuts note that the nation is in much better financial shape than it was in '82.

Consequently, they don't think Mr. Bush is likely to reverse his "not over my dead body" pledge on repealing cuts. The comparatively better fiscal state today also helps explain why Kennedy is "just trying to advance the debate," as an aide says, rather than introducing legislation.

"The fiscal position of the government is stronger now than it was then," says Robert Bixby, director of the nonpartisan Concord Coalition, a budget watchdog group.

Twenty years ago, Reagan's budget director was forecasting $200 billion annual deficits into the indefinite future. Senator Dole could make a persuasive argument to backtrack. He won over the president.

But the Reagan years are not the Bush years. For starters, Bush began his term with a surplus. Reagan inherited a deficit. And while economists predict deficits for the next few years, in the long run, they say, surpluses will likely return - albeit, greatly reduced.

Forecasters for both parties in Congress recently suggested that, in 10 years, the projected surplus will drop from an estimated $5.6 trillion to about $1.8 trillion. While that represents a significant drop, it's still a surplus, says Robert Reischauer, former director of the Congressional Budget Office.

"It does not appear that we run the risk of reentering an era of large and growing unified budget deficits," he says. "The more likely situation is that the deficits, triggered largely by the recession, will be replaced by a balanced budget some time around the middle of the decade."

Still, this does not preclude a raucous debate over the role of the president's tax cut - the biggest since Reagan - as it relates to the fiscal health of the nation. According to the Concord Coalition, the Bush tax cut is expected to account for about 45 percent of the reduction in surpluses over the next 10 years. The recession is the next greatest cause, at 40 percent, plus the unexpected costs of the war on terrorism.

Arguing that conditions have changed since Congress enacted the president's tax cut, Kennedy wants cash available for several "national priorities." They include Social Security, Medicare, and preschool education.

To do that, his proposal would delay tax relief scheduled to go into effect in 2004. That move would affect only wealthier Americans, couples who file jointly and earn more than $130,000 a year. Under his plan, no one would pay higher taxes than they do now. The increase in the child tax credit would go ahead. So would relief for the "marriage penalty."

AT a breakfast with reporters, White House Budget Director Mitchell Daniels countered that the way to handle the looming entitlement crisis is to reform Social Security and Medicare, and support them by growing the economy. The way to grow the economy, he says, is to keep the president's tax cuts exactly as they are.

For those concerned about deficits, Mr. Daniels says this year's negative numbers will be "very, very small" by historical standards.

While Washington fights over philosophy and numbers, the ultimate arbiter in the dispute may end up being the public in the next election. Right now Republicans appear to be doing all right. A new Investor's Business Daily/TIPP poll conducted this past weekend in conjunction with The Christian Science Monitor shows that only 13 percent of Americans blame the Bush tax cuts as the key reason for the coming federal deficit. Most important, respondents said, were Sept. 11 emergency spending (38 percent), the recession (27 percent), and government spending (18 percent).