Greenspan deals blow to tax-cut package by Bush

WASHINGTON -- Federal Reserve chairman Alan Greenspan dealt a blow Tuesday to President Bush's drive for new tax cuts, saying he did not believe the economy needed further stimulus and warning Congress to be "very careful" to keep budget deficits from exploding.

Greenspan, who two years ago lent critical support to Bush's first round of $1.35 trillion in tax cuts, threw cold water on the new $1.3 trillion package. Bush is seeking $670 billion in accelerated tax cuts and elimination of taxes on stock dividends as part of a stimulus program. The rest of the package is devoted to making the 2001 tax cuts permanent. They are now due to expire after 2010.

Delivering the Fed's twice-a-year report on the state of the economy, Greenspan said that while war worries were weighing on business investment, the economy was poised for a significant rebound once that uncertainty passes.

"I am one of the few people who is still not as yet convinced that stimulus is a desirable policy," Greenspan told the panel.

He told the Senate Banking Committee that Congress needed to "be very careful not to allow deficits to get out of hand, especially when we are going to be running into a significant problem starting 2010, 2012 and beyond" with demands retired baby boomers will be making on the Social Security and Medicare programs.

Praise from Democrats

Democrats, who have attacked Bush's tax-cut proposals as too expensive and too tilted toward the wealthy, quickly praised Greenspan's comments.

Senate Minority Leader Tom Daschle, D-S.D., called Greenspan's remarks "a kiss of death" for the Bush package. Sen. Kent Conrad, D-N.D., the Budget Committee's top Democrat, said Greenspan had been "clear and unambiguous about the importance of curbing deficits."

The White House sought to limit the damage from Greenspan's comments, noting that he did restate his long-held view that the current policy of taxing dividend income twice -- once at the corporate level and again when investors receive the dividend payments -- should be eliminated.

However, Greenspan said that given the worsening deficit picture, the Bush proposal to eliminate taxes on dividends paid to investors, which would cost $385 billion over 10 years, should be paid for, either by raising other taxes or cutting government spending.

Greenspan urged Congress to restore pay-as-you go rules for budget legislation. The rules require any increases in spending on entitlement programs such as Social Security or cuts in taxes to be offset by spending reductions or tax increases elsewhere so the proposals do not worsen the deficit. Greenspan also urged Congress to put back in place expired budget rules that limit increases in discretionary spending.

Bush's tax-cut package does not contain any offsets to keep the deficit from rising. Some administration officials have argued that budget deficit concerns have been overstated.

But Greenspan said a rising deficit can affect the economy.

"Contrary to what some have said, it does affect long-term interest rates, it does have a negative impact on the economy," he said.

Republicans, who happily pointed to Greenspan's endorsement of the first tax cut, were displeased with his new remarks. Sen. Jim Bunning, R-Ky., complained to Greenspan, "You are once again interjecting yourself into matters in which you have no business."

White House spokesman Ari Fleischer insisted the administration was pushing forward with an aggressive sales effort for the new tax cuts. Treasury Secretary John Snow traveled to Wall Street on Tuesday to promote the administration's economic package and Bush and Vice President Dick Cheney scheduled a White House meeting with key Republican senators to promote the plan.

Snow said, "We've only begun to sell the package." He predicted that once the dividend proposal is more clearly understood it will pick up support.

"The president's proposals are going to be very well received once they are better understood," Snow told a small group of reporters at the Treasury Department late Tuesday.

Greenspan's comments Tuesday were in sharp contrast to the support he provided two years ago when he came out in favor of Bush's first large tax cut at a time when the government was projecting surpluses of $5.6 trillion over the next decade, not the record deficits now forecast.

The Fed's new economic forecast projected economic growth this year of 3.5 percent, up from 2.8 percent last year, when measured from the fourth quarter. It said inflation would stay low and the unemployment rate, currently at 5.7 percent, will be around that level at the end of the year.

Private economists said Greenspan's comments did not change their view that the Fed, which has pushed a key Fed interest rate to a 41-year low of 1.25 percent, would leave rates at that level probably through the summer, believing it has done enough to guarantee better economic growth this year.

Among Greenspan's criticisms of the tax-cut package, he took issue with the argument that the cuts could pay for themselves by stimulating faster economic growth.

"Short of a major increase in immigration, economic growth cannot be safely counted upon to eliminate deficits and the difficult choices that will be required to restore fiscal discipline," Greenspan told the committee.