Stumbling Blocks to a Bush Tax Cut

Dec. 21, 2000 -- President-elect George W. Bush may well be war-weary after hiscourt battle to win the Florida vote, but he might find putting intopractice his promised tax cut an even greater struggle.

A set of tax-relief proposals gleaned from the huge U.S. budget surplus totaling $1.32 trillion was the centerpiece of Bush’s presidentialcampaign, but the road from tax-cut promise to tax-cut reality is loadedwith obstacles.

The Democrats, who campaigned for a more targeted tax breakintended to help those in lower-income brackets, said Bush’s tax cuts wouldbenefit only the wealthiest Americans and are staunchly opposed to it. Alsoagainst tax-cut plans is Dennis Hastert, the Republican speaker of theHouse.

One more stumbling block might be Federal Reserve ChairmanAlan Greenspan, a key driver for helping to pass President Clinton’sdeficit-reduction initiatives, and someone who might frown on a tax-cutplan that might add to inflationary pressures and diminish the budgetsurplus. Bush doesn’t want to pick a fight with the Fed.

Slim Hope for Pushing Through New Initiatives

The big questions ahead for the next president — and the country — are:Can Bush navigate these treacherous waters and get a major tax-cutinitiative approved? And, even if he does, can it even provide anynear-term balm to an economy that shows signs of weakening?

The answer to the latter appears negative: The effects of any tax cutaren’t typically felt immediately, rather taking months at the earliest,and sometimes years to filter through, notes Mark Zandi, chief economist atEconomy.com. Given that Bush’s proposal loads many of the biggestcuts on the back end of the 10-year plan, this may be true in the eventthat it comes to fruition.

On the former question, the razor-thin Republican majority in the newCongress will make pushing through ambitious political reform of any kinddifficult, says Dennis J. Goldford, a professor of politics at DrakeUniversity.

“The tax cut issue will be seen through the prism ofpolitical advantage for the Democrats,” he says. “The question is how muchdo they want to be seen as spoilers, and how much do they want to hinderthe president? Should they go ahead and say that everyone gets a tax cut,or should they try to spoil the president’s chances of putting through anybills.”

Some feel the politics are being played by the Republicans, and are turned off by Bush’s recent tone on the economy and are critical of the president-elect for using the economy for political gain.

“What you’re seeing is President-elect Bush and his team actually talking down our economy, actually probably injecting more fear and anxiety into the economy than is justified,” Gene Sperling, President Clinton’s national economic adviser, said this morning on ABCNEWS’ Good Morning America. “I think that’s a serious mistake for him.

“They may think they get a short-term political gain in that if they say the economy is at risk of recession, they may feel that may justify a very large tax cut, which is one of their goals,” Sperling said. “I think it’s always a mistake for anybody in a position of responsibility to be talking down their own economy.”

Others, like Tom Gallagher, an analyst at the International Strategyand Investment Group, a New York broker-dealer specializing in economicresearch, are more optimistic about the new president’s chances of enactingthe tax cut.

“On the one hand, it’s easy to point to the obstacles tobipartisanship. On the other, a president’s first year is usually his mostproductive,” says Gallagher, adding that he sees a “reasonable” chance of atax cut and government spending increases.

Tax Break May Have Adverse Impact on Economy

But it’s not simply the political deadlock in Congress that mighthinder the president; there are economic factors, too.

One of the biggestconcerns is the impact of a tax break on interest rates and the economysays Robert W. McLeod, professor of Finance at the University ofAlabama in Tuscaloosa.

“While it might be popular with the Republicans,an across the board tax cut might be harmful to the economy,” he says. Partof the reason for low interest rates over the last few years is we haveused the surplus to pay down the national debt, and if the surplus isreturned to taxpayers in the form of tax relief — as Bush proposes — itmight cause undue inflationary pressure and require more interest ratehikes from the Federal Reserve, he argues.

And given the current prospect of a slowing economy, and perhaps even athreat of recession, timing will be everything for Bush, says Zandi.

“Cutting taxes is difficult because it depends on the legislative processand negotiations as to exactly what you come up with,” he says. “If tax cutstake hold with strong economic growth, the Fed might have to intervene withrate hikes. But tax cuts can come through when the economy is soft andstruggling, and so it’s something desirable because it stimulates theeconomy. It’s hard to gauge what the economic implications will be, but anew Congress will be more inclined to provide some kind of stimulus if theeconomy is struggling.”

Bush’s tax proposal isn’t completely out of the question, says Zandi.What might put some wind in his sails is the Congressional BudgetOffice’s soon-to-be released report on the budget surplus, which islikely to show an upwardly revised projection.

“After that, the $1.3trillion tax cut won’t seem that large and so perhaps it will be easier forthe Republicans to get something that more closely resembles their tax planthrough Congress,” he says, adding that should the economy slowsignificantly such a move would be a big mistake. “If the economy weakensand revenues go down it will cut into the surplus and the projections forthe surplus will be revised down — that’s not good news”