The Economy: Is It a Treat or a Trick?

By John Greenwald

What Washington politicians were singing last week sounded like the chorus of a wistful Beach Boys song. Wouldn't it be nice, they all sang, if we could cut taxes? Wouldn't that make voters happy in 1992 and lift the economy too? Once the song started, almost no one wanted to be caught out of tune. Not since both parties raced to heap tax breaks on their constituents a decade ago had Washington seen such an outbreak of charitable zeal. While economists denounced the latest proposals as too little too late and virtually certain to worsen the federal deficit, their warnings went largely unheeded.

Lawmakers hastily crafted programs to appeal to everyone from the super-rich to the working poor. Texas Democrat Lloyd Bentsen, who chairs the Senate Finance Committee, stirred the most talk by proposing a $72.5 billion tax cut aimed squarely at the middle class. It would grant families a $300 tax credit for each child under the age of 19 and would permit all taxpayers to deduct as much as $2,000 a year invested in Individual Retirement Accounts. Bentsen would pay for the cuts by reducing defense spending. That would throw open last year's budget agreement for renegotiation, because the accord forbids Congress to shift funds from defense to other programs.

Politicians rushed forward with nearly a dozen rival plans, including a move by Democratic Senator Daniel Patrick Moynihan of New York to revive his long- standing proposal to cut Social Security taxes. Not to be outdone by the Democrats, Senate Republican Phil Gramm of Texas and House minority whip Newt Gingrich of Georgia introduced wide-ranging legislation that repeated the Bush Administration's cherished call for reduced capital gains taxes. But a skeptical public remained unimpressed by all the ballyhoo and maneuvering. In a TIME/CNN poll by the firm Yankelovich Clancy Shulman last week, 77% of the 500 adults surveyed said they considered discussion of a tax cut for the middle class an election-year gimmick.

President Bush watched the stampede with rising concern. He straddled the fence for most of the week, caught between conflicting advice from top aides, who on one hand urged the President to make an effort to jump-start the economy but on the other cautioned against support for any steps that would increase the deficit. He finally declared himself in favor of sticking to last year's budget deal, which would rule out Bentsen's proposed cuts and all other plans that laid claim to defense dollars. "I'm not going to be totally opposed to some of these ideas I hear up there," Bush said, but declared: "I don't want to reopen the budget agreement because I think the constraints on spending are helpful."

The economy may have the last word on how Washington responds to stubbornly stagnant business conditions. The Commerce Department said last week that orders for such durable goods as steel, machinery and aircraft fell 3.2% in September following a 4.1% decline the previous month, indicating that the recovery is barely kicking. Unless the economy can right itself soon, the pressure on politicians to appear to do something to help their constituents is likely to keep growing.

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CREDIT: TIME Graphic by Joe Lertola

[TMFONT 1 d #666666 d {Source: Tax Foundation}]CAPTION: A JUMP-START OFTEN GETS RESULTS

With reporting by Michael Duffy and Hays Gorey/Washington