A Tax Cut, Not a Whimper
From the January 13, 2003 issue: It's time for the administration to take a shot at stimulating the economy.
Jan 13, 2003, Vol. 8, No. 17 • By FRED BARNES, FOR THE EDITORS
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.