It’s bad enough that Sir Alan Greenspan and Co. are prolonging the economic slump by delaying interest-rate cuts. But that policy error is now being compounded by a tax bill reported out of the Ways and Means Committee that provides virtually no stimulus to this year’s economy, and defers future tax-rate reductions for five years (and by the way asks tax payers to believe that one presidential election and three congressional elections later they will actually receive the benefits of lower tax rates).
In view of the tax-cut disillusion which has characterized nearly all opinion-poll surveys in recent years, expecting Washington to make good on a six-year tax-cut promise is asking a lot. For those tax-cut cynics who always ask What have you done for me lately?, the answer is nothing. Nada.
All of this has economic consequences. Suppose there’s an auto sale scheduled for next week where prices will be discounted 10% or more. Do you shop today or tomorrow, or do you wait a week? Answer: wait a week. The same principle holds for interest rates and tax rates. If people anticipate lower rates in the future, they are likely to delay spending and investing decisions until they can capture the benefits of those lower interest and tax costs.
Therefore, while macro-policies are turning more stimulative, the insistence on delay may well create the perverse effect of making the economy worse in the short run. As for the long term, what we’re left with is promises, promises. In particular, the House decision to lower the bottom tax bracket to 12% from 15% without relieving any of the higher brackets sets up a capital-formation barrier in 2001. High-end income should really be viewed as capital. Greater after-tax rewards could unlock this capital and replenish the shortage of risk taking that plagues the economy. But the Ways and Means bill postpones this crucial recovery ingredient. Delay could even prolong the slump.
On Fox News Sunday, Treasury Secretary Paul O’Neill said “It’s not over yet” when asked about the absence of significant tax relief for 2001. For many weeks, the Treasury man had been proclaiming the recovery benefits of an accelerated tax-cut plan. But the Ways and Means decision, led by Chairman Bill Thomas, has thrown a wet blanket over this. A spokesman for House Majority Leader Dick Armey told me, “We are happy with the bill. We are fully supportive of Chairman Thomas.”
Supply-side Ways and Means member Paul Ryan would like to amend the bill on the House floor, making all the tax-rate reductions retroactive. But he acknowledges that this sort of change may have to wait until the full reconciliation of the House-Senate conference, which will be many months away.
Republican congressional leaders should forget about class-warfare redistribution tables. Senator Daschle and Congressman Gephardt are blowing this smoke, but the GOP shouldn’t inhale. In political terms, growth always trumps class-warfare redistribution.
As job layoffs mount and virtually all economic indicators are pointing down, the GOP must make a stronger case for growth. Lower tax rates equal growth. Rebating surpluses is fine. Limiting government is fine — as is the moral case to cap tax burdens. But at the end of the day, the public will rally behind tax cuts aimed directly at restoring economic growth — not merely subpar 2% growth, but maximizing our potential to grow at least twice that rate.
If growth is the solution, then Mr. Thomas’s tax cut bill has become the problem.