Alan Reynolds

Will the president's tax plan be counted among the first casualties of war?

A week after stocks staged a prematurely optimistic war rally, the Dow retreated 307 points in just one day, back to 8214.

That was up from the prewar blues, but it is still awful. After all, the Dow bottomed at 8236 shortly after the horror of Sep. 11, 2001. And the Dow was a thousand points higher last June, before Congress promised to "restore investor confidence" by burdening business with new regulatory and legal risks. Surprisingly, the latest setback occurred despite the fact that Coalition troops took control of Iraq's largest oil fields, pushing oil prices back below $30.

The stock market and military setbacks were immediately followed by a setback for the president's tax plan in the Senate. Only four days after decisively rejecting by 62 to 38 a proposal to shrink the 10-year tax cut to $350 billion, more than a dozen senators suddenly changed their minds about that. The president's plan would otherwise have "cost" about $663 billion ($388 billion from eliminating the second individual tax on dividends), according to the Congressional Budget Office, although serious newspapers have been uncritically echoing an unserious $726 billion figure.

The wayward senators seized upon the president's request for an extra $75 billion for temporary war-related expenses as a handy excuse for permanently trimming the tax cut by more than $300 billion. Nobody who passed the fourth-grade math could fall for that story.

You have to wonder if those senators would have been so fickle about suddenly withdrawing support for the president's tax plan if news from Iraq and the stock exchange had not just as suddenly turned against the president. A timely cut in tax rates and dividend taxes would boost investor and consumer spirits, and the resulting stock market rally would boost the president's clout with Congress -- and such presidential popularity would make it professionally risky for any senator to oppose sensible cuts in tax rates and dividend taxes. But that chain suddenly has a weak link: the Senate.

Another weak link is the fact that supporters and critics of the president's plan keep talking as though estimated revenue is all that matters, regardless of which tax is cut or how or why. What should be a thoughtful examination of the cost and benefit of each item in the tax package -- and perhaps adding a few other improvements -- has degenerated into a primitive Keynesian feud over its sheer size.

Alan Reynolds

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