A Very Risky Fiscal Policy

It's time for Washington to get a grip on policy. With the nation poised for war, anxious about terrorism, and jittery about the economy, plans to restructure the tax system, recast the social safety net, and remake the world are pouring out of the Bush Administration. Congress and the country are simply overwhelmed. We need to get the Iraq war over, settle down, and talk about these ideas or they risk being dismissed or adopted regardless of their merits.

We worry most about taxes. The recovery remains fragile and could use help. We also favor cutting taxes on capital to stimulate long-term investment and economic growth. But add up all the proposals floating around on dividends, income, savings, and retirement, and the cost in tax revenues looks way too high. The budget deficit for the rest of the decade appears out of control just when defense spending is soaring and the approaching retirement of the baby boomers will place huge burdens on Social Security and Medicare.

No less a personage than Federal Reserve Chairman Alan Greenspan is predicting trouble unless we take control of our finances. The White House is banking on myriad tax cuts to generate enough growth to pay for the deficits. But Greenspan told Congress that "faster economic growth alone is not likely to be the full solution to the currently projected long-term deficits." Something would have to give.

That would probably be Social Security and Medicare. Washington is not about to trim defense and homeland security, which, together with entitlements and interest on the Federal debt, add up to 85% of the budget. Because there's so little left to cut, ballooning deficits would force major shrinkage of the social safety net. Privatizing both Social Security and Medicare have been discussed for years, with no consensus. Forcing this dramatic change by driving deficits higher and bleeding the government of revenues is no way to go. A wrench in social welfare should not happen by stealth.

This also applies to radically shifting the tax base. The current debate focuses on the size of tax cuts, but the thrust of the new proposals puts the tax burden on consumers and consumption. By cutting taxes on savings and dividends, we might spur investment. But we would also make the tax system more regressive. We should talk about this kind of momentous move, not read about it in the White House annual economic report to Congress. And we should also be discussing a realistic energy policy that reduces consumption and dependence on Mideast oil.

Tax cuts by themselves will not generate growth if people are too afraid to spend or invest. Today they're playing it safe, using the money from tax cuts to pay down credit-card debt and mortgages at record levels. While war and terrorism are the most obvious risks facing us, endangered safety nets, galloping deficits, and confusing tax proposals make for uncertainty as well. Remember, too, that Japan and Germany have high savings rates--and consumption taxes--but miserable growth rates. We are running a great risk with fiscal policy at precisely the wrong time.

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