Federal Reserve Chairman Alan Greenspan delighted President George W. Bush in January when he gave h...
Federal Reserve Chairman Alan Greenspan delighted President George W. Bush in January when he gave his blessing to a tax cut. His nod pulled the rug out from those who had opposed the idea. Momentum for a cut soon began to build.
Now, Greenspan has sparked debate on a new trigger proposal designed to assuage fears that a tax cut might spawn big budget deficits later if the huge budget surpluses now being projected for the next 10 years do not actually materialise.
The proposal has gotten decidedly mixed reviews. Economists have dismissed it as unworkable. The Bush administration has kept silent. Meanwhile in the Senate, it has emerged as the leadership's best hope for persuading moderate Republicans to support a tax cut.
Under Greenspan's proposal, Congress would enact a series of triggers that would hold up the next phase of a tax cut or spending increase if it looks like the Government won't meet the projected surplus target for the coming year.
Tax cuts and spending increases already in effect would not be affected. In a twist, Greenspan suggested that the trigger be linked to the level of publicly held debt remaining on the books. It is a proxy for the surplus, but the outcome is the same.
A group of 14 moderate senators has embraced a variation that would block only the tax cuts, not spending increases, and link the delay to whether the administration is formally predicting a surplus in its budget estimates for the coming fiscal year.
Senate Finance Committee Chairman Charles Grassley, an Iowa Republican, has said he will push to include a version of the plan in the Senate bill, possibly extending the trigger to cover spending as well.
"When you have four or five Republicans that like it, and you have got only 50 Republicans, it is irresponsible not to consider it," Grassley said. Most analysts expect to see some trigger mechanism in the bill.
Yet, while political strategists are praising the trigger as a potential saviour for the tax-cut legislation, economists are denouncing it as ill advised and unworkable.
Perhaps the most stinging criticism comes from conservatives, who warn that their most important argument for cutting taxes to improve the long-term economic climate would be undermined if a trigger were put in place. "The whole purpose of lowering tax rates is to encourage people to work and invest more, and to do this you have to have certainty about the tax reductions," said Daniel Mitchell, the Heritage Foundation's chief tax analyst.
"To explicitly put something in the tax code that says we will take it back if the surpluses do not turn out, that is in effect saying do not take the tax cut seriously," Mitchell said. "It is an absolutely wretched idea."
On the left, the Center on Budget and Policy Priorities has assembled a spate of arguments that a trigger mechanism would be ineffective and might even backfire by blocking needed fiscal stimulus if the economy were to plunge into recession.
Both Congress and the administration could easily circumvent the trigger, the center argues, either by using rosy economic forecasts or by changing the timing on spending increases to manipulate the size of the budget surplus. Moreover, the bulk of the projected surpluses are expected to come in the latter part of the decade well after the tax cuts that the president is proposing are fully in effect.
Liberals prefer an alternative suggested first by former Treasury Secretary Robert Rubin that would have Congress do its tax cutting piecemeal, enacting small tax cuts each year as it becomes clear whether the projected budget surpluses will arrive.
For political purposes, lawmakers could earmark a specific proportion of the projected surpluses in advance in a special 'reserve'' fund. The money would only be tapped if the reserve fund were large enough to pay for the tax cuts. That, too, has its shortcomings, according to analysts. Since Congress cannot transfer surpluses to future years, the only way such a plan could work would be if lawmakers used the earmarked portion to pay down more of the national debt.
"The prospect that they would use the money to buy down huge amounts of debt in this environment is preposterous," said Carol Wait, head of the non-partisan Committee for a Responsible Federal Budget. "There isn't the political will for that."
Both sides argue that Congress experimented with triggers in the 1990s with the Gramm-Rudman-Hollings deficit-reduction bill, but the effort bogged down because the enforcement mechanism broke down.
In truth, many Congress-watchers say that, necessary as it may be politically in the Senate, the trigger will be dropped when the two chambers negotiate a compromise bill. Both parties oppose it in the House, and Senate leaders are lukewarm about it.
Nevertheless, for now it is at the forefront of the tax debate, and Greenspan the man who proposed it initially is quietly watching the scuffle that it has set off. The White House is not cheering this time around.
Art Pine via the Washington Bloomberg newsroom
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