Tax Cuts: Now More than Ever - Brief Article

National Review, Feb 5, 2001

Over the last few years, Republican politicians have learned to defend tax cuts on grounds of fairness. Simple fairness demanded an end to the marriage penalty; the estate tax was unfair as a form of multiple taxation; tax cuts generally were a way of reducing an unfair "tax overpayment" (a.k.a. the budget surplus). These moral arguments were thought, correctly, to be more powerful in times of plenty than economic ones would be.

But the politics of prosperity may be coming to an end. Alan Reynolds, director of economic research at the Hudson Institute, points out that the evidence of a recession is stronger now than it was in the autumn of 1990. Retail sales and industrial production have been falling since September. Housing starts and light-vehicle sales peaked a year ago. It is time for Republicans to dust off the economic argument for tax cuts: that they improve incentives to work, save, and invest.

That means that those tax cuts stimulating economic growth ought to be at the top of the agenda in Washington. The conventional wisdom there suggests the opposite. Republican congressional leaders such as Denny Hastert have suggested that Congress should first pass tax cuts with bipartisan support, such as the elimination of the marriage penalty and of the estate tax, before turning to the tougher task of reducing income-tax rates. But that course would allow Democrats to block the economically important rate cuts by claiming to have cut taxes already.

Bush may be able to get some Democrats to support lower tax rates, but the only way to reach a grand bipartisan deal that enjoys the support of most Democrats, including their leaders, is to whittle away the marginal rate cuts to nothing. So Bush has to be prepared to pass the tax cut on a largely party-line vote. There are enough Republicans nervous about passing a "massive" tax cut that he may need to shrink his tax cut even to win narrowly. But he should compromise on incidentals such as estate-tax and marriage-penalty relief rather than on the rate cuts. The marriage penalty can in any case be ended with no special effort if the tax-rate cut is structured appropriately. If a single person moves into a higher tax bracket when his income reaches $40,000, a married couple should move into that bracket at $80,000. (The late Sen. Paul Coverdell had a bill to this effect.)

There is another reason for moving fast on pro-growth tax cuts. As long as tax cuts are expected but not enacted, they depress the economy as individuals and businesses wait for them to take effect. (For the same reason, Alan Greenspan's interest-rate cuts will not be fully effective until people think he has finished with them.) House majority leader Dick Armey argues that to have maximum effect, any tax cut should be retroactive to the beginning of 2001. He also suggests that a tax-cut bill include provisions to expand IRAs and 401(k)s. Others want to add corporate tax relief and a reduction in capital-gains taxes.

Fine. But the main point is to pass a pro-growth tax cut as soon as possible. A partisan fight on taxes is unavoidable; and it may as well start now.