Taxes: A Misplaced Fear.(tax policy)(Brief Article)

When it comes to the economy, President Bush has been tongue-tied. This is not just a result of his famously mangled diction. His well-spoken aides have the same problem. Sometimes they say that signs of an economic slump are reasons to pass his tax cut. At other times they concede that his tax cut could not do much to fight a recession because most of the cut would not take effect until 2006. If Bush made his tax cut take effect faster, he would be able to make an economic case for it without wavering. So why doesn't he accelerate it?

Because of a political taboo. A faster tax cut would require the federal government to make do with less revenue. And that, in turn, might plunge the federal budget into deficit. Which is unthinkable.

Actually, it doesn't take a deficit to scare Republicans these days. It takes the mere prospect of one. What they fear is that a deeper, faster tax cut would cause the official government projections to forecast a deficit for any of the next ten years. The distinction is important because the projections are likely to be wrong. They ignore, among other things, the effect tax policy can have on the economy. A tax cut that causes a deficit on paper will not do so in reality if it stimulates economic growth sufficient to keep the budget in balance.

And if a deficit did occur in reality? The heavens would not fall. The difference between government revenues and spending does not have much economic significance. Deficits do not lead to inflation unless governments finance them by printing money. Nor need deficits raise interest rates. Even if government borrowing slightly increased interest rates-and in the context of the global market for credit, the increase would indeed be slight-the effect would be trumped by another factor: Tax cuts ...