The Magazine

The Bush Paradox

From the July 4 / July 11, 2005 issue: Why do his fortunes lag as the economy improves?

Jul 4, 2005, Vol. 10, No. 40 • By CESAR CONDA and JEFFREY BELL
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The heart of Bush's second-term domestic agenda is three big items: making the first-term tax cuts permanent; reforming Social Security by scaling back its demographic deficit and carving personal retirement accounts from the payroll tax; followed by broad-based tax reform, to be shaped later this year by the report of a Bush-appointed study group.

These three proposals, the third of which is not yet defined, have one simple element in common: They cannot be passed with Republican votes alone. None of them fit into the simple-majority context of a budget resolution. This year's Republican-backed budget resolution, which stretches ahead five years, can extend some tax cuts scheduled to expire at the end of 2008 to the end of 2010, and almost certainly will do so. But to make the tax cuts permanent under Senate budget rules, a minimum of 60 senators would be needed to overcome a point of order. The same 60 votes would be needed to enact a broad reform of the tax code, or to make the huge changes in Social Security the president has asked for. Of their nature, the three big items of Bush's second-term agenda will have to be bipartisan, or they won't happen at all.

Six months ago, it appeared plausible that Bush could push one or more of these things toward enactment. In the first term, he effectively used the presidential bully pulpit to overcome resistance to his war strategy and his tax-cut-centered economic strategy. But there appears to be something about his second-term economic agenda that is not only resistant to the bully pulpit, but shows signs of denying Bush credit for the kind of strong economic growth that normally benefits an incumbent administration. As long as this is the political dynamic, Democrats have no incentive to reduce the level of confrontation--not when the very thing that often stung them in the first Bush term appears to be helping them now.

What explains this dynamic? One explanation may be that the three big-ticket items are not just bipartisan, they are interrelated. Momentum on one can improve the chances for momentum on one or more of the others. It can be argued, for instance, that the stock market has underperformed this year in relation to the robust growth of business profits and continued low long-term interest rates. One factor restraining stock prices has to be the growing likelihood that this Congress will not make the tax cuts permanent. In turn, the lack of a bull market this year undoubtedly makes the idea of personal accounts appear less attractive than otherwise would be the case.

For the dynamic of obstruction and polarization to change, and barring a road-to-Damascus turnaround by Senate Democrats, the politics of the economic debate must change in the president's favor. The likeliest way for this to happen is by a return to confrontational debate on the tax issue.

The Bush tax cuts have now been effective for about two years, and more and more conclusive data on their impact is becoming available. Recent numbers from the Congressional Budget Office show a surge in income tax revenue (around 15 percent higher than a year earlier) well beyond most predictions--and utterly contrary to Democratic lamentations about a hollowing out of the tax base due to Bush's "tax cuts for the rich." With little left to gain in this Congress by downplaying partisan disagreement on taxes, the administration should soon be taking credit for the success of the 2001-2003 tax cuts in stimulating strong growth, as well as producing unexpectedly strong revenues.

With uncertain present prospects of congressional movement on Social Security or making the tax cuts permanent, the report of Bush's tax reform group later this summer takes on great importance. In the present mood, little will be gained by trying to split the difference between the parties' approaches to tax reform, or by offering incremental change. As Bob Packwood figured out as Senate Finance Committee chairman in 1986, a sudden movement toward a very broad tax base and unexpectedly low rates is much more likely to get people's attention than tinkering on details. Ask Senate Democrats to explain why a simple, low-rate tax code should be still another occasion for obstruction. The minute they open their mouths, the political dynamics of the economic debate will again begin to favor the president.

Jeffrey Bell is a principal of Capital City Partners, a Washington consulting firm. Cesar Conda is a principal of Navigators, LLC, a Washington consulting firm, and served from 2001-2003 as economic adviser to Vice President Dick Cheney.