Hed — Taxing Times

Whenever policymakers try convincing their constituencies that something could be made better, they had better first establish the need to change that certain something. Otherwise, why bother?

Such is the case with the round of tax cuts being proposed by both parties in Washington. As of late last week, three competing versions House, Senate and White House were being considered. While it remains unclear how the various plans will be sliced and diced, significant change seems imminent indeed, perhaps adding $100 billion to the federal deficit over the next five years.

To propose such extravagant tax cuts at this point seems bent more out of politics than economics. Thanks to one of the most buoyant business cycles this century, the budget deficit is shrinking to below $100 million low enough that President Clinton’s budget director is actually discussing how to divvy up future budget surpluses.

Common sense would tell you not to mess up this handsome predicament. Clearly, Americans are handling the current tax loads very nicely and the last thing the government should do is risk the loss of revenues.

But the tax cut movement is like a runaway locomotive and at this point little can stop it not Wall Street euphoria, not the calming assurances of Fed Chairman Alan Greenspan and certainly not the homespun notion that if it’s ain’t broke, don’t fix it.

Even a cut in the capital gains tax, which we have generally supported, seems like a questionable move at least right now. In theory, the main benefit of lowering the capital gains tax is so that entrepreneurs can use the savings to invest in new companies a way of infusing the economy with additional capital.

The problem is that the economy is already infused with capital there’s more than enough money around for new investments, even at the current 28 percent tax rate. (There’s also widespread debate as to whether a cut in the capital gains tax is all that effective in spurring new investment.)

Proposals for tax credits for children are even more dubious. Just how the economy is going to be bolstered by providing parents a few hundred bucks a year is a mystery, not only to us but to many of the nation’s economists. Again, there is no economic justification, just a political one.

We’re hardly questioning the need for tax adjustments. The flat-tax proponents correctly identified the inherent inequity of breaks, credits and loopholes that benefit only those rich enough to have lobbyists pressing their case every few years.

A flat tax on the order of Steve Forbes’ proposal in 1996 is not the ultimate answer, but neither is the onslaught of tax cuts that the Congress is about to approve in some fashion.

The real pity is that the time will come when selected tax cuts will make economic sense say, when the next recession rolls around. Prudent fiscal management that is, wiping out the deficit and keeping a little bit in reserve would provide lawmakers with more cushion for those not-so-swell times.

Unfortunately, Washington policymakers believe in prudence of the political kind.