Tax-Cut Hemorrhage

The Congressional Budget Office’s report Tuesday that federal tax revenue has taken the steepest percentage drop in more than half a century is no cause for panic. In a time of recession, running deficits is what governments do, because to further restrict spending would deepen and prolong the downturn.

But the report’s projection that deficits will continue for at least four years does indicate the government’s vital signs are weakening--and could drop dangerously low unless the administration ends its addiction to tax cuts.

An unexpectedly deep plunge in capital gains tax revenue, a slowing economy and the administration’s 2001 tax cut have all contributed to a revenue shortfall, with receipts running 6.6% under last year’s. The deepening debt has helped kill a prescription drug benefit program, which would have cost more than $40 billion a year. Still alive, however, is the prospect of a war against Iraq, which could cost more than $50 billion even before expenses of an occupation are counted. What’s more, America’s allies aren’t willing to help foot the bill this time.

But the most significant roadblock to bringing down the deficit is the 10-year, $1.35-trillion tax cut that Bush proposed and Congress approved last year. The wealthy, who spend a smaller percentage of additional income than the less well-off and thus offer less stimulus to the economy, will receive the lion’s share of cuts in coming years.

President Bush is calling on Congress to make his cuts permanent instead of sunsetting them after 2010. If it agrees, that will almost certainly wipe out any return to budget surpluses.

Even worse, the president, in the aftermath of his economic forum in Waco, Texas, is widely reported to be considering more tax cuts. He would, among other things, reduce the capital gains tax rate below the current 20% for long-term gains and allow more generous write-offs for selling stocks at a loss. But the budget office has estimated that cutting the capital gains tax would have little effect on long-term economic growth, and the tax code already provides a cushion for moderate investment losses. Both changes could also exacerbate stock selling.

With the economy stumbling as it tries to emerge from recession, the last thing the president and Congress should be doing is generating greater debt with dubious benefits. Big deficits lead to higher interest rates, gobbling up money that businesses could otherwise reinvest. Congress should reduce last year’s tax cut, not consider new cuts.