Lame-duck lesson

The final budget of a lame-duck president usually isn’t worth taking seriously, especially when the president doesn’t seem to understand what “budget” means (hint: it involves setting limits on spending). Still, we can’t resist rising to the bait President Bush dangled earlier this week, when he called on Congress to make permanent the tax cuts it enacted on a temporary basis in his first term. Those cuts aren’t due to expire until Dec. 31, 2010, or nearly three full tax years from today. Having steered the nation far more deeply into debt than any previous president, Bush’s effort to play a role in future tax policy is laughable. This really is a decision that should be left for the next administration and the next Congress.

Tax policy isn’t written on stone tablets handed down from above. It is a product of a vigorous political debate about the size and role of government, the effect of different taxes on the economy and the potential for lower or higher rates to generate more tax revenue. There are few widely accepted truths, one of them being that a growing economy pumps more dollars into Uncle Sam’s coffers. Beyond that, much of what’s left is spin and myth.

For instance, consider the deep cuts in the tax rates for capital gains and dividend income that were enacted in 2003. Since then, those taxes have raised substantially more money than they did before the rates were slashed. Correlation? Certainly. Causation? Maybe not. Cutting capital gains rates typically boosts revenue as taxpayers rush to make sales delayed by concerns about the tax burden. But over the long term, some analysts say, capital gains receipts rise and fall with business cycles, regardless of what’s happening to tax rates. Despite the various tax cuts enacted in 2001 and 2003, the current (and fading) expansion hasn’t matched the growth in production, employment, investment or wages seen during previous postwar expansions, according to the left-leaning Center on Budget and Policy Priorities.

Lawmakers don’t have to rely on economists for guidance on this issue. Voters in November will be choosing between presidential candidates who’ve staked out clearly different positions on Bush’s cuts. The remaining Republican candidates support making the cuts permanent. Both of the Democratic contenders have said they favor rolling back at least some of the cuts, particularly the lower tax rates for wealthy individuals. It’s not exactly a referendum on taxes, but it’s close. In the meantime, Congress and the administration can focus on stimulating the slowing economy with tax and spending measures that are truly temporary.