Parsing a Tax Cut's Benefits

President Bush won yet another tax cut from Congress last week, even if it wasn't exactly what he asked for. Whether the cut will now score a victory in the economy depends on which end of the telescope you're looking through.

On the one hand, the $350 billion cut over a decade is only about half of what Mr. Bush requested. Just a few weeks ago, he denigrated that amount as "itty bitty." And he didn't win a total victory in his key demand to end double taxation of dividends. Instead, Congress put a 15 percent cap on that tax rate.

But in simple terms, Bush at least won a big tax cut. And he unexpectedly won something he didn't ask for: a cut in capital-gains taxes.

Just as important, he changed the terms of congressional debate: Democrats didn't argue about whether there should be a tax cut, only about how much it should be.

In future years, the debate will turn to the various sunset provisions on some of the tax measures. If Congress retains the cuts as expected, the cost of this measure will be a lot more than $350 billion.

That's where the problem arises. While most economists agree that the tax cut will have some short-term benefit as taxpayers spend cash that otherwise would have been taxed, no one really knows how much the government deficit will rise in the long term. And estimates vary on how much the cut will help the economy grow, and thus increase federal revenues.

Ten-year projections are common in budget discussions but notoriously inaccurate. They depend on many subjective premises and different forecasts of global and national events. On top of this uncertainty is the certainty that baby-boomers will begin retiring over the next 10 years, placing new demands on Social Security and Medicare. Projections are that Medicare, in particular, won't be able to handle the load.

To guard against the worst case, Congress and the administration must act to rein in deficits by cutting overall spending and reforming Medicare. The defense budget is a good place to look for trims: The House and Senate last week passed $400 billion defense bills with little or no discussion of why the country needs several of the weapons systems the Pentagon asked for or whether they can be funded over the long term. As usual, Congress added billions in spending that the Pentagon didn't request.

The president says he'll turn to Medicare reform next. That effort will be complicated by both parties' eagerness to tack their different versions of a prescription-drugs benefit onto the current program. Without Medicare reform, such a benefit would hasten the system's insolvency.

Meanwhile, Bush's reelection may ride on how many new jobs the economy can create over the next 18 months. Having staked so much on a tax-cut package as the needed economic tailwind, he's now positioned to reap the rewards - or blame.

You've read  of  free articles. Subscribe to continue.
QR Code to Parsing a Tax Cut's Benefits
Read this article in
https://www.csmonitor.com/2003/0528/p10s03-comv.html
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe