Wisdom of big tax cuts questioned

Posted: Sunday, March 30, 2003

WASHINGTON -- The longer and nastier the war with Iraq gets, the harder it will be for President Bush to muster support from skeptical lawmakers for those big tax cuts he is seeking.

Yet in the face of rising deficits and unknown war costs, the administration is working hard to salvage its $726 billion tax cut plan after it was unexpectedly chopped in half last week by the Republican-run Senate.

Why the push for a big tax cut during wartime? Right now the war preoccupies Americans, but sooner or later their attention will snap back to the economy. Bush and his advisers do not want to see the country emerge from war only to slip into recession.

An initial burst of consumer and business spending after the 1991 Gulf War soon faded. A true economic recovery did not come for months -- too late to help Bush's father win re-election to the White House. Also, that war was quick and decisive.

It is a lesson not lost on Bush advisers disinclined to see history repeating itself. Thus the heavy push for tax cuts.

''The president's plan is still the best way to create jobs, provide economic security to American workers and families, and grow the economy for our future,'' Treasury Secretary John Snow said last week.

But many economists question whether the centerpiece -- elimination of taxes on most stock dividends -- will have short-term benefits for most Americans.

Momentum seems to favor smaller tax cuts, said Stanley Collender, budget analyst for the Fleishman-Hillard consulting firm.

Bush's tax cuts face even bigger opposition if the war persists, ''even if it doesn't get worse but just takes longer than people anticipated,'' Collender said. ''In addition, to the extent the war keeps going on, the recovery in the economy will take longer.''

Initial euphoria over the war's quick start gave way last week to lower spirits and a recognition it could drag on as U.S.-led troops met stiffer-than-expected resistance from Iraqi forces.

Bush did not try to dispel such concerns. Fighting will last ''however long it takes to win,'' he said.

Rising unemployment, lethargic consumer spending, a hiatus in business investment and a stock market retrenchment after a fizzled war rally raised fresh recession concerns.

Bush's high overall approval ratings continue to far outpace his ratings on handling the economy.

He suffered a major setback last week when the Senate voted 51-48 to cut his tax cut plan by more than half, to $350 billion, through 2013. Administration officials pledged to lobby House-Senate budget negotiators in an effort to undo the damage.

But lawmakers of both parties wondered were the money would come from to pay for both tax cuts and the war, as Bush submitted an emergency request for $74.7 billion to cover for initial war costs.

''We have to ask ourselves just what can we afford,'' said Sen. Patrick Leahy, D-Vt. ''I think the American people are willing to sacrifice a high-end tax cut to get money for people in the field. We have to take care of them first.''

Should Bush even be asking for tax cuts at such a time?

President Lyndon Johnson's refusal to seek a tax increase in the late 1960s to help pay for the Vietnam War contributed to more than a decade of high inflation and soaring deficits, analysts suggest.

In pressing for tax cuts now, Bush risks losing the support of fiscal conservatives ''who feel like we should not have tax cuts at the same time as a war,'' said James Thurber, a political scientist at American University.

''People are very cautious about tax cuts right now because of the deficits and because they don't know what the costs of the war will be.''

But there are important psychological -- and political -- dimensions to Bush's push for wartime tax cuts.

The first President Bush's problems were not just a sluggish economy ''but the impression that the White House was disengaged,'' said GOP consultant Scott Reed.

While Bush's proposal to eliminate taxes on stock dividends might not have a direct effect on most families, its passage could trigger a substantial stock-market rally. Such a rally could have political advantages for Republicans, given that nearly two-thirds of Americans own stocks, either directly or in retirement plans.

''The stock market is a barometer and an indicator of the economy,'' Reed said. ''People invest in stocks when they think the economy is heading in the right direction.''

Tom Raum has covered Washington for The Associated Press since 1973, including five presidencies.



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