SOMEBODY TELL THE BUSH WHITE HOUSE that Republicans now control the Senate. And while you’re at it, remind the president’s men and women of three other things. One, President Bush has only one shot–now–at stimulating the economy. Anything done next year will be too late to affect economic conditions before the 2004 election. Two, it takes only 50 senators, plus Vice President Cheney, to pass a tax cut by using the reconciliation process. Three, there’s a potent new force in American politics: President Bush. In 2001, he emerged as a decisive commander in chief. Last year, he became a political powerhouse, able to influence the outcome of congressional elections and a lot more, including tax legislation. For good reason, many Democrats are terrified of crossing Bush.
Given all this, it’s astonishing the White House is so goosey about championing a growth-oriented tax cut that would all but guarantee a robust economy next year, when Bush will be seeking reelection. In the days before the January 7 unveiling of Bush’s tax proposal, a major White House concern was neutralizing charges the plan would unduly favor the rich. President Bush himself got in the act, telling reporters he’s “concerned about all the people.” His focus, Bush said, is “how best to help those folks who are looking for work.” This is a fine sentiment, but it suggests a far narrower agenda than the mandate Bush and congressional Republicans won in the November 5 election. And it’s that mandate–for tax cuts to stir an economic resurgence helping everyone, not just the unemployed–that the president’s plan must be measured against.
The question is whether Bush is seeking everything in a stimulus package that’s economically necessary and politically achievable. It’s true the economy is growing slightly and the stock market is no longer cratering. But there are real problems–a sinking dollar, rising oil prices, persistently lagging consumer confidence, to name just three–plus the lingering possibility of a renewed recession. Bush’s initial tax cut got us out of the 2001 recession, but it wasn’t sufficient to sustain strong economic growth. After all, only about 30 percent of it has gone into effect. Much more is needed–a real stimulus–and quickly.
Somehow the idea got planted at the White House that a watered-down tax cut, less susceptible to Democratic attacks, would be better politically for the president. Nothing could be further from the truth. The politics here are quite simple: The economy itself is the only political factor that matters, not the packaging, not the distributional tables, not the size of the majority that votes for the tax cut. Rather than avoidance of Democratic criticism now, Bush’s goal must be a booming economy a year from now. If the economy is growing at a crisp pace in 2004, Bush will bask in the glow of good times and win reelection easily. If it isn’t, he’ll be blamed and reelection will be difficult. Whatever hedges the president is seeking in his tax proposal–not cutting the individual income tax rate for the top bracket (38.6 percent), for instance–won’t aid him politically if the economy is tanking in 2004.
Hedges are unnecessary. Bush has the political clout to get practically everything he asks for. Sure, he can make concessions to Democrats to get their support for his tax proposal. But why do it? Should the economy remain weak next year, does anyone think Democrats will say, well, don’t heap all the blame on Bush because we’re in this with him and it’s our fault too? Not a chance. If he refrains from moving the cut in the top income tax rate forward from 2004 to 2003, is it conceivable that Democrats will cease their attacks on Bush as protector of the wealthy? No way. Since he won’t be spared attacks anyway, the president has every reason to seek the maximum economic stimulus.
The president took the first step to improving the economy when he recognized, months ago, that something must be done. He fired his Treasury secretary, Paul O’Neill, who disagreed on that fundamental point. And the Bush team understands the source of the economic trouble. Consumption has held up remarkably well, but investment hasn’t. There’s been a significant reduction in business investment, a precipitous drop in venture capital spending, and a whopping decline in wealth from the fall in stock prices. In drawing up the outlines of a new tax cut, the White House quickly embraced a number of smart ways to stir investment. One is accelerating the phased-in income tax rate reductions of Bush’s 2001 tax cut. The lower the rate, the greater the impact on investment. The higher the rate, the less capital unleashed for investment. And of course it’s a lower top rate that’s most important because higher earners are the most likely to invest their windfall.
Bush is rightly enamored of ending the double taxation of stock dividends, long a pet project of R. Glenn Hubbard, chairman of the Council of Economic Advisers. The wisest course with the most economic clout would be to let businesses deduct the cost of dividends. Still, it’s understandable in political terms why Bush would want to end taxation of dividends for individuals. This should enhance investment a bit and restore a modicum of tax fairness.
At the White House, the dividend issue provoked an internal debate over increasing the budget deficit. The idea of limiting the tax cut to 50 percent of the value of dividends was discussed (and leaked to the press). But the anxiety about the deficit was misplaced. Yes, going halfway in eliminating the taxation of dividends would lead to a smaller deficit the first year, but so what? There’s no political or economic reason to be spooked by a deficit of $200 billion or so in an economy of nearly $11 trillion. No candidate for any office has ever lost because the deficit was too big. And the evidence of the past two decades is that deficits don’t drive up interest rates and thus adversely affect the economy. For Bush, what’s paramount is the economy in 2004. No one will pay a moment’s notice to the deficit if the economy is strong. And no one will pay attention to the deficit if it’s weak, either, because the deficit will be dwarfed as an issue by the bad economy.
There are other sensible steps Bush should take, some of which he’s taking, some he’s not. For example, all tax cuts should be made effective January 1, 2003. That would please financial markets and trigger a stock market rally. Expanding the speeded-up depreciation in the tiny 2002 stimulus package would promote investment. Slicing the capital gains tax rate in half for all new (after January 1, 2003) investments would spur both investment and business formation. This may be a bridge too far for the White House, however, since it would further skew the impact of tax cuts in favor of the rich.
The good news is there’s a way around the distributional problem, one recommended by Democrats such as Senators Mary Landrieu and John Kerry and by Republican supply-siders. The solution is to cut the payroll tax for every worker. Dropping the payroll tax rate by one or two percentage points would ease the biggest tax burden most Americans face and cut the cost of hiring new workers. A study by the Institute for Research on the Economics of Taxation found a one percentage point reduction would create 500,000 new jobs. And it wouldn’t jeopardize Social Security because surplus cash in the trust fund is already being siphoned off to pay for government programs.
The saying around Washington these days is that if Bush wants something badly enough, he can get it. In the case of tax cuts, he can wind up with more than he asks for. In 1981, President Reagan did. Then, the White House was wary of indexing the tax code for inflation. But indexation was introduced on the Senate floor and approved, then endorsed by Reagan. It stayed in the tax bill. At the time, Republicans controlled the Senate but not the House. Now they control both houses of Congress, making them all the more capable of strengthening Bush’s tax proposal. Democrats may scream, but 19 Democratic senators are up for reelection in 2004, and 7 or 8 of them are vulnerable, thus unlikely to oppose tax cuts. So the stage is set for a Bush triumph on taxes. The only question is whether he’ll get everything he can or needlessly settle for less.
–Fred Barnes, for the Editors
