There’s a lesson for President-elect George W. Bush in the experience of the two other Republican presidents of the past 20 years. The first, upon arrival in Washington, was urged to give up his plan for a big tax cut. It would spur inflation, swell the budget deficit, and cause unfairness by disproportionately helping the rich. That president rejected the advice, defeated Democrats to enact his tax cut, touched off an era of prosperity, and became the most successful Republican president of the 20th century, trusted by friends, feared by foes. That president was Ronald Reagan.
The second wisely wanted to prolong economic growth by cutting the capital gains tax rate. When Democrats, led by the Senate majority leader, blocked that tax cut, however, the president backed off. His fallback position was a promise not to raise taxes, ever. But at a bipartisan summit with Democratic congressional leaders, he abandoned that promise too and agreed to a tax hike. When the economy drifted into recession, his administration seemed helpless to combat it. After winning the presidency with 53 percent of the vote, he lost four years later with only 37 percent. That president was George Bush senior.
The good news about George W. Bush’s belated transition to the presidency is that he’s following the Reagan model, not his father’s. In fact, he’s doing it so convincingly that Republicans are emboldened and Democrats are beginning to waver. Unlike his father, he’s so far decided to ignore the conventional wisdom in Washington that he must abandon his campaign themes and govern in a bipartisan fashion, brushing aside his conservative base and reaching out to Democrats. And how is he advised to reach out? By scrapping his $ 1.3 trillion proposal to cut taxes for every American taxpayer. It’s too big, it will bring back a budget deficit, it’s tilted to benefit the rich. Everything, in short, that Reagan was told about his tax cut is now being shouted in the ear of President-elect Bush.
Inside the Beltway, this advice may look reasonable and realistic, coming as it does from the media, Democrats, even some Republicans and business lobbyists. Outside Washington is another story. There, the stock market has tanked and the economy is rapidly deteriorating. Capital spending has plummeted and retailers are terrified. True, a weakened stock market doesn’t always lead to a recession. And much of the evidence of an economic slide is anecdotal at this point. But there’s enough indication of trouble ahead that Alan Greenspan, poised as recently as two months ago to raise interest rates again, is now fearful. Just before Christmas, the Federal Reserve said “growth may be slowing further” and noted the possibility of “economic weakness in the foreseeable future.” That’s Fed talk for “sharp downturn ahead.”
So the case for a serious tax cut to energize the economy is impeccable, and both Bush and Vice President-elect Dick Cheney have made it. Fortunately, when the Bush tax cut, with its across-the-board rate reductions, was unveiled a year ago, it was designed for precisely the economic conditions the country now faces. Back then, Bush and his chief economic adviser, Larry Lindsey, appeared alarmist. Lindsey had famously pulled his personal assets out of the stock market. Now, they look like men of foresight. As Bush said in introducing his nominee for treasury secretary, Paul O’Neill, his tax cut spread over nine years “is part of the prescription for any economic ill that our nation may have.” Indeed, it is.
There are two other reasons for Bush to stick with his tax cut, one philosophical, the other political. The philosophical is that federal taxes are unfairly high. Federal tax revenue, at more than one-fifth of the nation’s gross domestic product, is at World War II levels — but without a war. The bite taken by the federal income tax has grown from 7.8 percent of GDP in 1994 to 9.9 percent last year, the Wall Street Journal noted recently. And once again, there’s bracket creep. People are working harder — nobody works harder these days than Americans — with too little to show for it. Regardless of the effect on the economy, taxes this high confiscate too much of people’s earnings.
The political case rests partly on a notion that is lost on most of Washington: The public craves a tax cut. Election Day exit polls showed slashing taxes was the paramount issue for Bush voters and number two for all voters, topped only by education. Pollster Frank Luntz tested voters electronically on MSNBC during the debates and convention speeches and found that when Bush talked up tax cuts for all Americans or said the surplus belongs to them, not government, the dials “shot through the roof.” Thus, politically, the path is clear for Bush to push tax cuts in his first 100 days (and education reform as well).
Bush has talked cheerfully about bipartisanship. But on taxes, no satisfactory compromise with Democrats is possible. They will never accept tax cuts across the board, since that means a trim in the top rate. And a tax bill without rate cuts won’t provide serious relief for all taxpayers. Sure, Bush can pare down how much he cuts the top rate. Instead of dropping it from 39.6 percent to 33 percent, he could agree to, say, 35 percent or 36 percent. Getting any decrease in the top rate would be a victory for Bush. And he needs victories as well as successes. Finding common ground with Democrats on education would be a success. Defeating them on taxes would be a victory. It would have the same effect as Reagan’s victories on spending and taxes two decades ago. It would establish his presidency. It would make him respected by Republicans and feared by Democrats. And questions about his legitimacy would vanish into thin air.
Fred Barnes, for the Editors
