- The Washington Times - Wednesday, August 21, 2002

With measures of consumer confidence continuing to dip and the Conference Board's latest index of leading economic indicators retreating into negative territory during both June and July, Congress should seriously consider reducing taxes when it returns from summer vacation next month.
Following the president to Iowa's state fair last week, House Minority Leader Dick Gephardt declared, "What we need is an honest appraisal of what's happening [in the economy] and then [a] coming together between the parties and between the Congress and the president."
Fair enough. Mr. Gephardt will find his "honest appraisal" of the economy in the Commerce Department's July 31 report on recent economic activity. He will note that overall economic growth has sharply decelerated, falling to an annual rate of 1.1 percent in the April-June quarter.
Of particular significance is the fact that the growth rate of consumer spending, which represents two-thirds of gross domestic product (GDP), has decelerated from 6 percent in the fourth quarter to 3.1 percent in the first quarter to 1.9 percent in the second quarter. Meanwhile, nonresidential fixed investment (business spending on structures, equipment and other capital items) continued to decline. Federal government expenditures, on the other hand, have grown by an annual average of nearly 10 percent during the past three quarters.
Considering the Federal Reserve's report that unused production capacity continues to approach 25 percent, Mr. Gephardt knows there is little prospect of substantive positive investment growth in the near future. Despite President Bush's symbolically important decision to refrain from spending $5.1 billion of a nearly $30 billion supplemental appropriation, Mr. Gephardt also knows this decision will have little consequence on the overall thrust of burgeoning federal spending, notwithstanding the moans and groans emanating from the Democratic caucus. Under these circumstances, therefore, boosting consumer spending in the near term represents the best opportunity to re-ignite the economy.
Given this "honest appraisal" of the current state of the economy and the Fed's regrettable decision last week not to lower short-term interest rates, how might the White House and congressional Democrats and Republicans "com[e] together" to reach this goal? The answer is obvious: tax relief.
In the current political climate, what kind of tax relief can Republicans and Democrats both support? Despite its recuperative effects, a Republican-supported, across-the-board, supply-side tax cut clearly is not in the cards. Nor is a Democratic-favored cut in the payroll tax. To reinvigorate consumer spending, both parties should surely be able to come to an agreement that would accelerate the implementation of several of the tax cuts passed in 2001. The menu of agreeable options seems inexhaustible.
Why not immediately begin reducing the current middle-class marginal income-tax rates of 30 percent and 27 percent to their eventual levels of 28 percent and 25 percent, respectively? The current $600 per-child tax credit will eventually become $1,000. Why not partially accelerate its implementation? Alleviation of the egregious marriage penalty is not scheduled to begin until 2005? Why not sooner?
How much tax relief these options will produce will be a matter for the Joint Taxation Committee to calculate. In any event, bipartisan agreement to reduce lower- and middle-class taxes must be the first step. Determining how much would be next. $50 billion? $75 billion? $100 billion? Mixing and matching would follow.
Yes, accelerating tax relief will increase the deficit in the short term. In a less politically charged atmosphere, that is a consequence most Democrats would normally embrace. This is especially so given the assuredly adverse impact on employment from an increasingly likely double-dip recession. With the gargantuan global capital market contributing the funds to finance the temporarily expanding deficit and under the currently soft economic conditions, there is little danger that long-term U.S. interest rates will rise.
An "honest appraisal" would fairly conclude that the best option to re-ignite the economy is to expand consumer spending by providing much-needed lower- and middle-income tax relief. Mr. Gephardt is also right on his second point: "Coming together" is essential to getting the job done. Why not make this the first order of business when you return to Washington, Mr. Minority Leader?

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