Read My Lips: No New Tax Cuts?

President-elect George W. Bush may well be war-weary after his court battle to win the Florida vote, but he might find putting into practice his promised tax cut a greater struggle.

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A set of tax-relief proposals gleaned from the huge U.S. budget surplus totaling $1.32 trillion was the centerpiece of Bush's presidential campaign, but the road from tax-cut promise to tax-cut reality is loaded with obstacles. The Democrats, who campaigned for a more targeted tax break intended to help those in lower-income brackets, said Bush's tax cuts would benefit only the wealthiest Americans and are staunchly opposed to it. Also against tax-cut plans is Dennis Hastert, the Republican speaker of the House. One more stumbling block might be Federal Reserve Chairman Alan Greenspan, a key driver for helping to pass President Clinton's deficit reduction initiatives and someone who might frown on a tax-cut plan that might add to inflationary pressures and diminish the budget surplus. Bush doesn't want to pick a fight with the Fed.

The big questions ahead for the president -- and the country -- are: Can Bush navigate these treacherous waters and get a major tax-cut initiative approved? And, even if he does, can it even provide any near-term balm to an economy that shows signs of weakening?

The answer to the latter appears negative: The effects of any tax cut aren't typically felt immediately, rather taking months at the earliest, and sometimes years to filter through, says Mark Zandi, chief economist at Economy.com. Given that Bush's proposal loads many of the biggest cuts on the back end of the 10-year plan, this may be true in the event that it comes to fruition.

On the former question, the razor-thin Republican majority in the new Congress will make pushing through ambitious political reform of any kind difficult, says Dennis J. Goldford, a professor of politics at Drake University. "The tax-cut issue will be seen through the prism of political advantage for the Democrats," he says. "The question is how much do they want to be seen as spoilers, and how much do they want to hinder the president? Should they go ahead and say that everyone gets a tax cut, or should they try to spoil the president's chances of putting through any bills?"

Others like Tom Gallagher, an analyst at the International Strategy and Investment Group, a New York broker-dealer specializing in economic research, are more optimistic about the new president's chances of enacting the tax cut: "On the one hand, it's easy to point to the obstacles to bipartisanship. On the other, a president's first year is usually his most productive," says Gallagher, adding that he sees a "reasonable" chance of a tax cut and government spending increases.

But it's not simply the political deadlock in Congress that might hinder the president; there are economic factors, too. One of the biggest concerns is the impact of a tax break on interest rates and the economy says Robert W. McLeod, professor of finance at the University of Alabama in Tuscaloosa. "While it might be popular with the Republicans, an across-the-board tax cut might be harmful to the economy," he says. Part of the reason for low interest rates over the past few years is we have used the surplus to pay down the national debt, and if the surplus is returned to taxpayers in the form of tax relief -- as Bush proposes -- it might cause undue inflationary pressure and require more interest rate hikes from the Federal Reserve, he argues.

And given the current prospect of a slowing economy, and perhaps even a threat of recession, timing will be everything for Bush, says Zandi. "Cutting taxes is difficult because it depends on the legislative process and negotiations as to exactly what you come up with," he says. "If tax cuts take hold with strong economic growth, the Fed might have to intervene with rate hikes. But tax cuts can come through when the economy is soft and struggling, and so it's something desirable because it stimulates the economy. It's hard to gauge what the economic implications will be, but a new Congress will be more inclined to provide some kind of stimulus if the economy is struggling."

Dubya's tax proposal isn't completely out of the question, says Zandi. What might put some wind in his sails is the Congressional Budget Office's soon-to-be released report on the budget surplus, which is likely to show an upwardly revised projection. "After that, the $1.3 trillion tax cut won't seem that large and so perhaps it will be easier for the Republicans to get something that more closely resembles their tax plan through Congress," he says, adding that should the economy slow significantly such a move would be a big mistake. "If the economy weakens and revenues go down, it will cut into the surplus, and the projections for the surplus will be revised down -- that's not good news."