The Magazine

Make the Tax Cuts Permanent

From the December 27, 2004 issue: Now.

Dec 27, 2004, Vol. 10, No. 15 • By JEFFREY BELL and STEPHEN MOORE
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IF JOHN KERRY HAD BEEN elected president, one of the clearest consequences would have been a bleak future for the major tax cuts signed into law by President Bush in 2001 and 2003 (most of which are scheduled to expire between 2008 and 2010). The tax issue was the most contentious issue of domestic policy confrontation between Bush and Kerry. Kerry saw Bush's cuts as a giveaway to the rich, while the president argued they were central to the economic recovery and gave financial relief to working families who needed it most. Bush promised in every debate and nearly every campaign appearance to make the tax cuts a permanent fixture of the tax code. Yet there is increasing White House talk of putting this off till much later in 2005.

Jon Kyl, the Republican senator from Arizona, believes Republicans should deliver on this Bush promise in the first 100 days of the second term. Kyl argues persuasively that "if President Bush has a voter mandate to do anything on economic policy, it's to make those tax cuts permanent. We should cash those chips in right now." Kyl complains that several of his Republican colleagues want to put the vote off for months, possibly even make it wait in line behind the elephantine issue of Social Security reform. That questionable strategy might mean Bush could end up with neither.

Tactically, putting off this vote makes very little sense. If Bush were to lock into place the cuts in capital gains tax and the dividend taxes to a 15 percent rate, the income tax rate reductions, the $1,000 per child tax credit, and the death tax repeal, the economy and the stock market would certainly reward him with a further burst of growth. Since these tax cuts were first implemented in May 2003, the Dow Jones Industrial average has increased by nearly 30 percent and GDP has surged forward by 4.5 percent. Without the stimulative effect of these tax cuts, John Kerry's tailor might now be measuring him for a new Inauguration Day suit.

The only reason these growth stimulants were passed as temporary changes in the first place was to fit within the straitjacket of Senate budget rules that have since expired. The longer the tax cuts are left on a temporary basis, the less salience they have for America's economic future, particularly when it comes to the unfolding decisions of long-term investors.

Politically, Bush needs to pocket some early and meaningful legislative victories. The tax cut is the logical choice here, as it is favored by every element of the Bush-Reagan coalition that delivered the sweeping victory on Election Day. Bush owes this to his loyal voter base.

There is one faction within the GOP that wants to put off tax cuts, and that is the deficit reduction crowd. They insist that the tax cuts must be "paid for" before they are made permanent. Yet, the evidence shows that because the Bush tax cuts revived economic activity in 2004, the Treasury collected about $60 billion more in tax revenues than was expected during the year, and the deficit shrank by $103 billion from its projected level. So the cuts already are paying for themselves. Moreover, the deficit hawks should be refocusing their ire at the source of the red ink problem: out of control federal spending.

Whether intended or not, the delayed tax cut gratification strategy is an engraved invitation to congressional critics of the Bush tax cuts to reopen the campaign 2004 debate on whether they ever should have passed--or whether they are still worthwhile given the new bugaboos of high budget deficits and a weakened dollar. (How raising taxes on domestic investment could possibly strengthen the dollar is never explained.) Delay simply means that every element of the first-term tax cut agenda becomes a bargaining chip for the pro-tax Nancy Pelosi Democrats and some squeamish Republicans, such as Senate Finance Committee chairman Charles Grassley.

Another strategic problem has emerged: Some Republicans, like the normally sensible Senator Lindsey Graham of South Carolina, say that in order to "pay for" Social Security reform, Congress is going to need to enact some tax increases, not tax cuts. This complicates things mightily. Graham favors raising the effective top tax rate on wages to at least 50.3 percent for most families making more than $87,900, now the statutory ceiling for the payroll tax. Graham even acknowledged in a December 11 Fox News Sunday interview that unless tax increases are a big part of Social Security reform, it would be wrong to make Bush's first-term tax cuts permanent. In short, he invites bargaining away the tax cut as part of some grand deal.