Tax-Cut Triangle

President Bush's tax-cut proposal is set to move center stage Monday. The Senate will take up its version of the package, and the president will argue on a cross-country trip that the Senate bill is not enough.

Mr. Bush wants $726 billion in tax reductions, including eliminating the double tax on dividends. The House of Representatives last Friday passed a $550 billion tax-cut bill that would lower the tax on dividends and capital gains to 15 percent. The Senate is scheduled Monday to consider a $350 billion bill - $421 billion in tax cuts and, amazingly, $81 billion in increases - that would exempt the first $500 in dividend income from taxes.

The convoluted Senate proposal resulted from negotiations between Finance Committee chairman Charles Grassley (R) of Iowa and moderate Republicans Olympia Snowe of Maine and George Voinovich of Ohio, who drew the line at $350 billion.

The largest chunk of Senate tax increases would fall on Americans working overseas, who would lose their tax exemption on the first $80,000 of income. That's a particularly bad idea. Many American teachers and religious workers overseas are paid relatively low salaries, partly compensated by not having to pay income taxes. Taxing their pay would lead to thousands of Americans returning stateside, unable to live on their overseas salaries.

The president insists the larger cut is needed to jump-start the economy and reduce unemployment, now at 6 percent. But Democrats and many economists, including Federal Reserve Chairman Alan Greenspan, warn the cuts would have little stimulative effect and pose a danger of runaway deficits.

A dividend tax cut is a good move. It will cause companies to share profits with investors and help the millions of Americans, including retired people, who rely on dividends for part of their income.

The purpose of larger tax cuts is not only to grow the economy, but to reduce the size of the federal government. Now with the chance to do the latter, Republicans are cutting funding without cutting programs.

That's the wrong approach. Congress should make at least some spending reductions to pay for more tax cuts, or it should stick with the $350 billion figure.

Meanwhile, the House will probably reject the Senate version. That's if the bill even passes the Senate - conservatives say the dividend tax cut is too small, while GOP moderates may balk at any changes.

Republicans will need fancy footwork to avoid a tax-cut train wreck.