The Magazine

The Cheney Tax Cut?

The hidden role of the vice president and his staff in Bush's bold plan.

Jan 20, 2003, Vol. 8, No. 18 • By MAJOR GARRETT
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VICE PRESIDENT CHENEY'S staunch, detailed, and defiant defense of the president's tax plan at the Chamber of Commerce last week was not an exercise in abstract "team dynamics." It was personal. Cheney and his staff had worked aggressively to beef up tax cuts and decimate federal aid to the states. Cheney didn't turn a reluctant president around. Senior administration officials say the president leaned in those directions all along. But it was Cheney, according to senior administration officials and top GOP congressional staff, who kept up the pressure on both fronts.

In his Chamber of Commerce speech, Cheney defended every portion of the Bush proposal in all its particulars, arguing that each provision would stimulate economic growth now and in the future. "I suspect we will be hearing some criticism of the president's plan," Cheney said. "These criticisms are not convincing, but they are familiar. We've all heard them before."

To those who warn of exploding deficits, Cheney said today's deficits are small by any historical measurement (1.5 percent of GDP, far lower than after previous recessions), and that a growing economy creates surpluses, not the other way around. Cheney also said failure to pass the president's tax cut could reduce GDP growth by one percentage point over the next two years, costing $800 billion in revenue over the next decade.

"Clearly, acting now to promote growth and to prevent even larger deficits in the future is the economically sensible thing to do," Cheney said. "The return path to a balanced budget is faster growth in the American economy." To critics of accelerating the reduction in income tax rates, removing the marriage penalty, and sharply increasing the child tax credit, Cheney pointed out all three would put real money into the economy now.

"A typical family of four with two earners making a total of $39,000 in income will receive more than $1,100 in tax relief--money to help pay bills and keep America's economy growing," Cheney said. And to those who said eliminating the double-taxation of dividends was a heartless sop to the rich, Cheney offered the following observations: Forty-five percent of all dividend recipients make under $50,000 per year; three-fourths of these recipients make less than $100,000 per year; and seniors collect more than half of all dividend income. He also argued that eliminating double taxation of dividends will improve corporate behavior in ways the SEC can't--with real-world market forces.

"Without the current tax penalty, investors will demand higher cash dividends and companies will be motivated to share them," he said. "This should discourage companies from artificially inflating profits just to cause a temporary spike in stock prices. Meanwhile, companies will be less inclined to over-leverage themselves with debt and more inclined to finance business expansion with equity. Over the long term, this will lead to healthier companies and stronger growth."

Cheney's political analysis of the coming stimulus debate argued for the boldest approach possible. Why? Because, as he and his staff argued over and over, the White House would be accused of favoring the rich no matter what the proposal contained; it was pointless to sue for peace in the supposed class war. The plan had to be bold.

Boldness, they said, would work, for both principled and practical reasons. First, principles are easier to defend on the stump (get ready for a variation of, "Either you're for the end of double taxation of dividends, or you're not"). Second, a bold plan offers more negotiating room when the final deal is struck in the Senate (look for eleventh-hour flexibility on aid to the states and dividend tax rates). "Whatever we did, we knew we would be vilified," said a senior administration official. "We did not want to play into the political game. We wanted to say: This is good policy and we're for all of it. Rate cuts. Eliminating double taxation of dividends. We didn't want to have to explain why we were only in favor of half or parts of a good policy."

As a result, Cheney and his team lobbied for and won an acceleration of all the Bush income tax cuts passed last year. The original plan had envisioned leaving out the cut in the top tax rate from 38.6 percent to 35 percent. Team Cheney also fought for and won complete repeal of taxes on dividends. The original plan had called for cutting taxes on dividends paid to individuals by half (try thinking up a stirring sound bite for that!).