Political wrangling between Republicans and Democrats threatens to scuttle any possible fiscal stimulus for 2001. With companies such as Nortel, Palm, Cisco, and Hewlett-Packard saying the high-tech economy is so bad that they have no "visibility" on revenues and profits for the second half of the year, a fiscal boost is needed fast. Both parties agree that President Bush's campaign proposal for a tax cut of $1.6 trillion over 10 years doesn't address the downturn. But they can't come up with an alternate package. Each is holding out for political advantage and maximum benefit to its core constituencies. The Democrats are pushing for a quick, small tax cut that benefits the working class. The President is still trying to help those at the top. It is time for both sides to make the necessary compromises to create a front-loaded plan that provides both short-term fiscal stimulus and long-term economic incentives.
Here's how to do it. Make income-tax cuts this year's priority. The $1.6 trillion cut is actually a hodgepodge: cuts on marginal income-tax rates, elimination of estate taxes and the marriage penalty, and bigger child credits stretched over a decade. A stand-alone income tax cut would amount to about $1 trillion. Democrats and moderate Republicans agree this size of an income tax cut could be passed quickly. The Bush Administration is free to submit a separate tax bill later for getting rid of estate taxes and debate it solely on its own merits. Or the Administration can package it with the marriage tax penalty and child care in a broader second tax bill.
The distribution of cuts is the real bone of contention in speeding up an across-the-board cut. Democrats and Republicans both have fair points of view. A reasonable compromise would be to cut the top rate a bit less from 39.8% to 35% rather than down to 33%, allowing leeway for somewhat bigger cuts for middle-class and working families. A modest rebate to families who pay high payroll but not income taxes would also be possible. The key, however, would be to front-load the tax cuts. Instead of taking five years--starting in 2002 and ending in 2006--for marginal rates to come down, as the Bush plan now proposes, they should drop faster over three years beginning in 2001. Lowering withholding for this year could provide a countercyclical boost to the economy.
There is room in the budget surplus for a $60 billion tax cut in 2001. But Washington must act soon. During the Ford Administration, when Vice-President Richard B. Cheney was White House Chief of Staff, when Treasury Secretary Paul H. O'Neill was in the Office of Management & Budget, and when Fed Chairman Alan Greenspan was head of the Council of Economic Advisers, Congress passed a tax rebate to combat a bad recession, which began early in 1974. Refund checks were mailed amounting to 0.5% of gross domestic product, or about $50 billion in today's dollars. But the political process took too long. By the time people got their money, in 1975, the recession was already over. The White House and Congress should stop their bickering and act now.