Mr. Greenspan, step aside: There's a new game in town. Throughout most of the '90s, as gimlet-eyed investors homed in on interest rates, it seemed like fiscal policy had gotten relegated to the back seat in policymaking. Now a new U.S. president has staged a resurrection of sorts, with an enthusiastic campaign for tax cuts that seems to be gaining popularity in congressional circles. But how would a tax cut affect the markets?

The short answer is: Nobody knows. Notwithstanding the political saber-rattling going on, the truth is that economists themselves aren't sure exactly how, or when, tax reductions affect the market.

A tax cut, by putting money back into consumers' pockets, would be likely to encourage more spending. And since consumer spending accounts for two-thirds of U.S. economic activity, it stands to reason that the market should applaud a tax cut. But economists say that it's not only impossible to predict how markets would react to individual tax cuts now, it's impossible to know how markets have reacted in the past.

As

Johns Hopkins University

professor Christopher Carroll explains, there's no conventional wisdom about the market's response to tax cuts "partly because there's not such a thing as a conventional tax cut." Even viewed through the lens of history, there are so many factors at work that it's questionable whether anyone can really gauge the effects of a tax cut on a vast economy.

"Presumably, to the extent the tax cut changed consumer buying patterns or allowed greater purchases, industries might marginally benefit that are providing those goods, says Drew Lyon, an economics professor at the

University of Maryland

. "But if you traced it out over 10 years and compared it to the size of the economy, it would be hard to say any individual sector would benefit. It would be too small to be measurable."

Carroll says the proposed

Bush

tax cut wouldn't necessarily be effective at stimulating overall consumption in the "old-style, Keynesian pump-priming" sense, because it's targeted at higher-income people. While lower-income people tend to respond to tax cuts by increasing consumption, it's less clear how people with higher incomes would react. "There's really not much evidence to indicate what high-income people would be likely to do with the extra money, whether they're likely to put it in stocks," he says.

All this uncertainty is a far cry from the macroeconomic instrument of choice throughout much of the 1990s: changes in interest rates. Reductions in interest rates tend to follow a fairly predictable pattern, at least in the short term. After (or sometimes in anticipation of) a rate cut, stocks usually surge, at least in the near term, on the assumption that a more expansive monetary policy will boost corporate earnings down the road. In the ensuing 12 to 18 months, according to conventional wisdom, a rate cut works its way through the economy to produce the intended stimulus.

In theory, it makes sense that a tax cut, too, would give the sluggish economy -- and by extension the market -- a kick in the pants. That will become more important as consumers start to get more tight-fisted. According to the most recent figures available from the

Department of Commerce

, in December consumers were still spending more than they earned, leading to a negative personal savings rate of -0.8%. But with layoffs accelerating and consumer confidence ebbing sharply, that's likely to change in the coming months.

Unfortunately, the notion of a tax cut as beneficent economic stimulus is just theory at this point. The reality is very complex, and even comparisons with tax cuts in the past don't offer much help. The economy today, just coming off a decade of outsize gains, is far different from the economy in the 1980s, which saw a couple of major tax cuts enacted. Back then, the U.S. was mired in economic stagnation.

Another difference between now and then is that in the 1980s, significant cuts in individual taxes were accompanied by changes in taxes on corporations and capital gains. In its current incarnation, Bush's proposed tax plan is notable for offering neither. "Of the $1.6 trillion cut that's talked about, all but about $25 billion

deals with individual provisions," Lyon points out.

Even now, economists don't agree on the results of the massive tax package enacted in 1981, the

Economic Recovery and Tax Act

, which cut both business and individual tax rates. "It did so many things -- it opened up very large deficits, and the tax cuts were accompanied by massive business tax cuts," says Joel Slemrod, a professor of economics at the

University of Michigan's

business school. "I'm not sure there's a clear lesson because the tax cuts were different, and the economic situation at the time was very different."

When the '81 tax cut was passed, the market actually fell, probably anticipating the approaching recession, says Lyon. "But I don't think anyone would say

tax cuts caused the recession," he adds.

Fast forward to the package of tax cuts legislated in 1986. Not long afterward -- October 1987, to be exact -- the market hit the wall. But that probably owes little to tax reforms. "I don't think you could trace an impact from the tax change," says Lyon. "While it did provide a large individual tax cut, on the whole, it increased corporate taxes about as much as it decreased individual taxes."

To some degree, the market's reception of any tax cut may ultimately depend on as nebulous a thing as sentiment, economists say. "It depends on what it's interpreted to be a signal of," says Slemrod. In other words, the market will cheer if it interprets a tax cut as a sign that the government prioritizes the needs -- and wants -- of investors. But a cut would get the thumbs down if it were seen to represent a lack of fiscal discipline.

In the meantime, no one's expecting a tax cut to sail through Congress. While it makes its way through the legislative process, a lot could change in the economy overall; the U.S. could go into a recession, or manage to avoid one. Also, the tax reduction as currently proposed could undergo changes -- it could get bigger or smaller, and business could get in on the act by landing tax cuts of their own. Given all those unknowns, it's too early to tell how the market would view the resulting package.

Even after the passage of a tax cut, it would take a long time to see the effects, Carroll points out. "It's unlikely that anyone will actually receive extra money in their paycheck or tax refund until at least a year from now, and probably considerably longer than that," he says. Plus, there's often a lag between when people receive extra income and when they feel comfortable enough to start spending more. "It maybe takes a year for the full effect to come into play for typical changes in income," Carroll says.

But investors might want to take note of one potential side effect in the near term: Some analysts believe that if the

Fed

considers a tax cut likely, it might ease rates less than originally planned. In a late January report, New York-based economic consulting firm

International Strategy & Investment

advised that "a tax cut similar to the one that Bush proposed would have a minor impact on the Fed -- knocking off the last 25 or 50 basis points of expected easing."