Will Tax Cuts Pay Off?

Maybe in a previous life George W. Bush traveled the land selling snake oil. What ails ya? Nothin' his bottled cure-all wouldn't fix. Naturally, he would be long gone when the mob returned with tar and feathers. In this life some things have changed. Snake oil is out; tax cuts are in. High energy prices got ya down? A tax cut will make the spike affordable. Might lose your job in the slowdown? A tax cut will turn this economy around and save your paycheck. That's the Bush pitch: tax cuts as a nostrum for everything, and a lot of folks are buying.

Last week the Senate Finance Committee swiftly approved a $1.35 trillion tax cut over 11 years--only modestly lower than the President's initial $1.6 trillion target and the $1.65 trillion package that emerged from the House last month. A final full-Senate vote should come early this week, setting the stage for a Senate-House conference by week's end. The writing is on the wall. Americans are about to get their largest tax cut in 20 years.

But is this real medicine? Economist and Bush critic Paul Krugman calls the ever changing arguments for tax cuts "startling in their intellectual dishonesty." If that's so, will the mob return in 2004 and run the good doctor out of town?

In truth, Bush doesn't even have that long. Should voters find that his tax initiatives are more placebo than prescription, Republicans will lose their narrow edge in Congress in 2002. That would render the President's plans for things like Social Security reform and national missile defense next to impossible to achieve and leave him limping into the '04 election. So a lot is riding on this giant gift to taxpayers, which the G.O.P. hopes to ram through by Memorial Day.

There's not much the Democrats can do to stop the Republicans. Senate minority leader Tom Daschle tried to delay the bill, but he was undermined when four Democrats on the Senate Finance Committee--its ranking member, Max Baucus of Montana, John Breaux of Louisiana, Arkansas moderate Blanche Lincoln, and the embattled Robert Torricelli of New Jersey--cut separate deals to get their pet rocks in the bill. They then signed on to the G.O.P. plan.

From the Republican point of view, tax cuts were never envisioned as a recession-stopping maneuver but more of a long-term growth driver that would lessen the impact of downturns while keeping the economy on a firm track. "It's the people's money," Bush has said repeatedly. Left unsaid but an integral part of his thinking: if you let them keep it, they will spend it, and that's what makes an economy grow.

That's still the G.O.P.'s overriding view, though the party has agreed to provisions that put $100 billion in taxpayers' hands by the end of next year--a late nod to Democrats, who pushed to speed up relief in an effort to help fight off a recession. How that money will be distributed is an open question--probably either in a one-time check or via reduced income-tax withholding.

The idea of a lump-sum rebate of $600 or so appeals to many economists. The thinking is that with a relatively large sum people will spend a portion on big-ticket items, like a washing machine, and stimulate the deeply depressed manufacturing sector. Reduced withholding, on the other hand, would produce pocket money in dribs and drabs and probably benefit service industries most.