TAX CUT WORRYWARTS

From the WSJ Editorial Page

"There will never be a better time to make the tax cuts permanent than now.

Thursday, December 16, 2004 12:01 a.m. EST

Vice President Dick Cheney opened the White House economic confab yesterday with a call to make the 2003 tax cuts permanent, and a good thing too. He and President Bush need to shore up some wobbly Republicans on Capitol Hill and inside their own Administration.

GOP bigfeet have been debating their priorities for the New Year, and some want to delay any tax-cut vote until they can fold it into a broader "tax reform" plan. That would mean the autumn of 2005 at the earliest, and perhaps well into 2006, because tax reform looks to be second in the legislative queue after Social Security. Realistically, that could also mean never, because passing any tax reform is going to be a very tricky exercise.

So allow us to remind Republicans what happened last November: You won! Democrats said the nastiest things about your tax cuts, called you tools of the rich and stepchildren of Halliburton, and voters nonetheless chose . . . your tax cuts. Now is not the time to walk around like Sally Field asking whether they really do like you. They just told you they did.

And one reason is because the tax cuts at issue are precisely those that helped to lift the economy out of its doldrums after they passed in mid-2003. The quarterly GDP figures tell the tale. While the first round of Keynesian, phased-in Bush tax cuts in 2001 did little, round two focused on boosting the incentives that would invigorate the economy's animal spirits. We doubt Republicans would be sitting on larger House and Senate majorities if they hadn't passed those lower rates.

Nonetheless, the 15% rate on capital gains and dividends expires at the end of 2008, while the marginal-rate cuts on income expire in 2010. Some Republicans are asking what's the rush, since those expiration dates are still a ways off. But investors have to think long term, and if they conclude that those lower rates are going to expire they will plan accordingly. Not extending those cuts would mean a substantial tax increase, and its impact on investment and growth would be felt long before 2008.

As for the politics, GOP momentum will never be stronger than in early 2005. Republicans might as well post as many quick victories as possible, and making the tax cuts permanent is likely to attract more Democrats the earlier it is offered. If they fail to get 60 votes, then Republicans can always fall back on the annual budget reconciliation process that only requires 50 votes to pass.

Some worrywarts say another tax cut vote will complicate their sales job on Social Security because Democrats will claim that tax cuts rob money needed to finance pension reform. But if Republicans can't beat that one, they have zero chance on Social Security in any case. Near-term budget deficits matter little to Social Security, which will run a surplus until 2016 or so. The scary retiree problem is of a different sort and a stronger economy resulting from permanently lower tax rates on capital and investment will make it easier, not harder, to finance personal retirement accounts.

It is true that Republicans complicated their job this year by extending through 2010 the child tax credit and the marriage penalty fix at the end of this Congress. These are the easiest tax cuts to sell politically, and it would be easier to win Democratic votes for dividend and capital gains tax cuts if these other tax cuts were in danger of expiring this year. But voting on what Democrats will inevitably call "tax cuts for the rich" won't get easier as the months pass. Republicans will be better off doing the right thing by the economy, and fulfilling a promise to voters, as soon as possible."

Contrary opinions welcome.