Tax Cuts Gain Relevance as Outlook Dims

By: Wall Street Journal

So far, tax cuts have seemed largely a pro-forma campaign plank for Republican presidential candidates: Call for extending President Bush’s tax cuts, establish your Reaganite credentials, and move on.

Until now, that is. With the economy heading toward an election-year slump, or worse, tax cuts to stimulate the economy are starting to look better and better as an item on the campaign menu.

This change is being driven by the ugly realities of the real world. The subprime-lending mess is getting worse, not better. Housing prices are falling. Oil prices are rising. Lenders are tightening the credit spigot. The Federal Reserve’s ability to keep cutting interest rates may be constrained by a plunging dollar, and the stock market took another big hit yesterday. The full impact of all this on the economy is only beginning to be felt.

A slowdown is inevitable, and a growing number of analysts are beginning to utter the dreaded “R” word. A recession in the middle of the 2008 presidential campaign would be a game-changer for both parties.

For Republicans, the bad news is that they inevitably would shoulder much of the blame because they control the White House. The good news for them is that they can start pushing tax cuts as a way to spur a slumping economy. That’s a better argument than pushing tax cuts for their own sake, which is pretty much where Republicans have been. The moment may be meeting the message.

For Democrats, the tax-cut question will be the opposite: If the economy is perilously close to recession, do you really want to propose tax increases? And a tax increase is precisely how Republicans portray any move to undo the Bush tax cuts.

“If you’re heading toward a slowdown and a credit-market problem, you certainly don’t want to be doing what some guys on the other team are doing, which is proposing a tax increase,” says Lawrence Lindsey, an economic adviser to the presidential effort of former Sen. Fred Thompson and an architect of the Bush tax cuts.

Of course, Democrats aren’t simply going to concede that argument. Look for Democratic candidates to begin portraying their own proposals for more modest middle-class tax relief as a stimulant for a sagging economy, not just as good medicine for middle America.

All told, the ground is shifting, and fast. Just this week, former Treasury Secretary Lawrence Summers, in a column in the Financial Times, declared a recession now more likely than not.

“Even if necessary changes in policy are implemented,” he wrote, “the odds now favor a U.S. recession that slows growth significantly on a global basis.”

And Mr. Summers, a Democrat in good standing who led the Treasury Department for President Clinton, suggests that this at least puts tax cuts on the table: “As important as long-run deficit reduction is, fiscal policy needs to be on standby to provide immediate temporary stimulus through spending or tax benefits for low- and middle-income families if the situation worsens.”

The costly war in Iraq makes it harder to push tax cuts without addressing that nagging problem of the federal budget deficit. But, as third-party presidential candidate Ross Perot discovered in the 1990s, the deficit has a limited impact on voters. A recession, on the other hand, is the sort of event that hits voters between the eyes and leaves them looking for immediate answers.

For much of this year, Republicans have been pushing their ideas for tax reform as much as their proposals for tax cuts. Mr. Thompson, for instance, has just unveiled his full tax plan, which calls for extending President Bush’s 2001 cuts, reducing the corporate tax rate and permanently repealing the estate and alternative minimum taxes. All of that would cost the government revenue in the short run and add to deficit worries.

But the new wrinkle Mr. Thompson has just added is a proposal for a voluntary flat tax. Taxpayers would have the option of paying a flat income tax, with two rates. For joint filers, that would be 10% for incomes up to $100,000 and 25% above that.

As that suggests, the Republican tax message has, to some extent, been bifurcated. To the Republican base, candidates offer tax cuts. To the center of the electorate, the message has been as much about simplifying the tax code, on the grounds that it is inefficient and widely hated.

The changing economic picture is likely to alter those calculations, prompting candidates to increasingly frame their tax proposals as a way to stem the economic slide brought about by the housing mess.

It is unlikely Democrats can avoid the temptation to join in. Their argument probably will be that Republicans, with their plans to extend tax cuts for upper-income Americans and keep down tax rates on dividends and capital gains, are stimulating the wrong end of the economy — the upper-income end.

Already, Sen. Barack Obama has proposed tax cuts aimed at the middle class, including a $1,000-per-family tax cut to offset rising payroll taxes. Sen. Hillary Clinton is pushing for tax cuts to help families save for retirement and tax credits for college costs. Those, too, can be portrayed as stimulating ideas — and undoubtedly will be.

Write to Gerald F. Seib at

* Content From the Wall Street Journal supplied by Elva Ramirez:
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