BUMS AND RUSHES

SYNOPSIS: Bush's push to pass his tax cut demonstrates the intellectual flimsyness behind it.

Hurry up!" say the Bush people. "We need tax cuts now! In fact, we need them yesterday!"

No, seriously. The administration has declared not only that it wants to accelerate tax cuts, but that it wants to make the cuts retroactive to the beginning of this year. Treasury Secretary Paul O'Neill has suggested that later this year he may be mailing out checks, refunding the "excess" taxes paid before those retroactive tax cuts actually become law.

Think of it as a bum's rush an attempt to run tax-cut skeptics out of town before they have a chance to make their case. But the attempt itself is a giveaway; it shows why the tax cut Mr. Bush proposes is not what the country needs.

Let's say right away in fact, let's make this observation retroactive to Jan. 1 that claims that tax cuts can be accelerated without reducing our soon-to-be-gone budget surplus are disingenuous. George W. Bush's economists have always tried to hold down the headline number on tax cuts by delaying the start of the big tax breaks. The $1.3 trillion number you heard about during the campaign, which has since grown to $1.6 trillion, depended on the assumption that many of the tax breaks would phase in only very slowly. Accelerate the phase-in, and the number becomes a lot bigger.

Furthermore, early tax cuts take a larger bite out of surplus projections. That $1.6 trillion cut is really $2 trillion off the surplus, because tax cuts reduce the rate at which the government pays off its debt and therefore raise its interest payments; the earlier the cut, the larger that effect. Each dollar of tax cuts this year will actually slash about $1.80 off the 10-year surplus.

The real story, however, is not the cost of this proposal but the way it undermines the whole rationale for tax cuts tilted toward the rich.

Conservatives used to be supply- siders they wanted tax cuts in order to increase the incentive to work hard, take risks and all that. But a retroactive tax cut, a cut in the taxes due on the income you have already earned, can't provide an incentive to earn more. Goodbye Reaganomics, hello crude demand-side Keynesianism.

And if pumping up consumer demand is the rationale for tax cuts, why must they go mainly to the very, very affluent?

If incentives are the issue, what you want to do is reduce marginal tax rates, the rates taxpayers pay on any additional income they earn. And it's hard to reduce marginal rates without giving disproportionately large tax cuts to people with high incomes. That, say conservatives, is why their tax-cut proposals always provide such large benefits to the top 1 or 2 percent of the income distribution. It's all about incentives, they claim, and it just so happens that the biggest positive impact is on the lifestyles of the rich.

But a retroactive tax cut, one that applies to income you've already earned, can't have any incentive effects; so why tilt it toward the top? If the purpose of a tax cut is simply to put more money into people's pockets, why not put it into the pockets of those who really need it? One simple proposal would be to make Mr. O'Neill's checks proportional not to income taxes but to Social Security and Medicare contributions; after all, four out of five families pay more in these payroll taxes than they do in income tax.

But Mr. Bush surely won't accept any such proposal, because the alleged need for economic stimulus is only an excuse. Senator Charles Grassley, chairman of the Finance Committee, was refreshingly frank: "If we do it earlier, I don't think we're really stimulating the economy. I think we're putting in place at an earlier time basic tax restructuring." In other words, all this talk about the need for fast tax cuts is an attempt to give skeptics the bum's rush, using panic over a short-term slowdown to hustle through long-run tax cuts that will do nothing to fight that slowdown.

It's a tactic Mr. Bush's people clearly like; they're doing the same thing on environmental policy, trying to use California's electricity crisis to hustle through a weakening of environmental protection in Alaska and elsewhere. It's up to the Democrats, and perhaps a few principled Republicans, to demonstrate that they aren't bums, and they won't be rushed.

Originally published in The New York Times, 2.7.01