Goldilocks is dead, and George W. Bush should admit it. The president has been selling his tax cut plan by saying that it’s not too big and not too small — it’s just right, like Goldilocks’s chair. This strategy of disciplined constancy worked well for Bush in Texas, and has so far in Washington. He stays on message. He sticks to his guns. It’s a nice contrast to Clintonian promiscuity, and to the style of normal politicians who overreact to the day’s events.
But Bush’s passivity is not going to work in this instance. The collapse in the financial markets and the downturn in the broader economy have transformed the landscape. Members of Congress are getting way out in front of the original Bush proposal. “There’s a consensus that we need to do something that will have a stimulative effect,” senator Olympia Snowe told reporters last week. The Bush administration hasn’t been hostile to moves to speed up the tax cut, but it hasn’t been leading them either. And that’s a problem. Because if Bush is not leading, then Democratic leader Tom Daschle will be leading, or Olympia Snowe will be leading. Or Robert Rubin and the “Keep the Money in Washington” chorus will be leading. And that will not produce helpful changes in the tax code. Nor will it be helpful to the Bush presidency.
There comes a time early in every new administration when the White House has to decide whether it is going to be on offense or defense. The Bush administration faces such a moment now. Congress is on the verge of setting the agenda on spending policy, on campaign finance, and now on tax policy. If the Bush administration is going to retain control of the agenda on these and other issues, it will require a quicker and more aggressive style over the next several weeks.
That will mean, first, acknowledging the deficiencies in the original $ 1.6 trillion Bush proposal. It is so back-loaded as to be almost meaningless. As Alan Reynolds noted in the New York Post last week, 81 percent of the tax cut in the Bush plan is delayed until after the year 2006. Of the total $ 1.6 trillion cut that the administration promises, taxpayers would see only $ 300 billion over the next five years. That’s so small it’s dwarfed by a typical day’s trading losses on Wall Street. And as for the additional $ 1.3 trillion that is supposed to be returned to taxpayers between 2006 and 2011, don’t hold your breath. Congress will probably revisit tax policy long before that, and re-imagine whatever faraway mirages are promised today.
The challenge for the administration is to grapple with the situation that confronts us right now. The gloom on Wall Street is spreading to Capitol Hill. It is pushing centrists, who are the swing votes here, in a Clintonian direction — trying to please two opposite constituencies at the same time. The centrists want to do something that appears stimulative, but they don’t want anything too big because they don’t want to endanger the surplus (and with it their spending plans). So they are headed toward a policy outcome that is Dick Morris-like in its triangulated triviality. They will offer some sort of front-loaded, targeted tax cut lite that looks like leadership but does nothing really to stimulate the economy. It’s the worst of both worlds. You don’t get meaningful tax reform, and since there is no real stimulative effect, the economy sours and you get lower federal revenues anyway.
The centrists are about to be further spooked by revised surplus estimates. Already some Wall Street firms have been lowering their guesses. In January, the Congressional Budget Office projected a $ 281 billion surplus in 2001. Last year, the Wall Street firms projected higher surpluses than the CBO, but last month they pulled back and estimated a $ 270 billion surplus. This month, they are gloomier. Merrill Lynch lowered its projected surplus guess to $ 250 billion, and Wells Fargo is projecting a $ 225 billion surplus this year and a $ 185 billion surplus next year, 40 percent lower than the CBO estimate for 2002.
In Washington, we all know, the prevailing assumption is that the U.S. economy exists in order to feed the government. As revenue estimates come down, the keepers of the conventional wisdom will cry: Big tax cuts must be sacrificed. Never mind if the economy goes into recession and millions lose their jobs. The federal budget must be balanced. That’s the important thing. Unfortunately, the Bush administration bought the foolish logic of this argument when it described its tax cut as a “refund.” If there’s no surplus, it stands to reason there can be no refund.
The first thing the administration needs to do is break out of this Beltway mindset. It needs to ask not what the economy can do for the government, but what the government can do for the economy. That leads to a politically and economically sensible grand compromise. We’ll offer one version, and we’ll call it the Kemp-Daschle-Bauer plan — but the details are less important than a commitment to moving now on an attractive and substantial package of tax cuts.
Start with something that is truly stimulative, capital gains rate cuts. The Bush people claim that lowering the top marginal income tax rate will stimulate economic growth. Well, maybe there are bunches of well-to-do slackers who will radically alter their behavior if their top income tax rate is cut from 39 percent to 38 percent in one year, then 37 in the next and 36 in the next and ultimately to 33 percent, but we’ve never met such creatures. We’re for lowering the top rate, but it’s not clear it’s worth the political capital in the short term. Meantime, capital gains taxes really do distort economic activity. Every time they have been cut, there has been a significant stimulative effect because people could more quickly alter their investment patterns, producing more capital for investment. That’s the Kemp part.
Then comes middle-class relief, the Daschle part. Senator Daschle wants to reduce the tax on the first $ 12,000 of taxable earnings to 10 percent from 15 percent. That measure alone gives all taxpayers an additional $ 600 a year, a tax savings that could be felt immediately if withholdings were adjusted. Then you could add other middle-class benefits and finish up with tax relief that strengthens families and so pleases social conservatives like Gary Bauer. The administration could strongly support the steps that Bill Thomas’s House Ways and Means Committee took last week, for example, doubling the child tax credit and expanding marriage penalty relief so that it extends to families with non-working spouses.
Warding off a recession will require leadership. And retaining dominance of the political agenda will require leadership. If the White House clings to a good-times tax plan that was drawn up two years ago, then congressional centrists will lead — poorly. If he seizes the moment, President Bush can put together a majority tax-cut coalition that will serve the country, and his administration.
David Brooks, for the Editors
