REVIEW & OUTLOOK
White House Wimp-Out?
Is President Bush really going to scale back his tax-cut plan?
While the economy stumbled through one of the worst Christmas shopping seasons in a decade, the White House leaked word that President Bush may "soften his stimulus package" (read: gut his tax-cutting plan) before it's even proposed this month. Which begs the question: Did Republicans lose the November elections?
One news leak has the President paring back his tax cut on dividends paid to individuals to 50% from 100%. Currently this money is taxed twice--once as corporate income and again when it's distributed to shareholders--and it makes economic sense to eliminate Uncle Sam's double-dipping outright. But if fairness is the other operative principle when discussing double-taxation, and the President has argued that it is, then that principle applies to all dividends, not just to half of them. Why not force the Democrats to defend the honor of double taxation?
White House aides also let slip that the Administration is dropping plans to accelerate marginal rate cuts for higher earners. These self-described "political advisers" are admitting, believe it or not, that they're afraid that Democrats will attack Republicans for proposing tax cuts for "the rich." They are apparently under the impression that Democrats will drop this objection if Mr. Bush proposes only a cut in dividends.
Hello? Democrats are already demanding that those rate cuts scheduled for 2004 and 2006 be repealed, on the same class-war grounds. They will play their class card no matter what the President proposes, and the details of the income distribution tables will matter less to voters than the state of the economy in two years.
Mr. Bush has to decide if he really wants to use fiscal policy to help the economy between now and 2004. Given the tepid recovery and high oil prices from the uncertainty of war with Iraq, the economy could use a boost. A federal tax cut would also help to offset what are almost certain to be damaging tax increases this year at the state and local level.
Accelerating the tax cuts at the highest marginal rates is especially good economics because they hit the people who pay most income taxes and are thus most responsive to tax incentives. The top 0.5% of all taxpayers pay 28% of all income taxes and the top 5% pay 56%. Should Karen Hughes and the other nervous White House spin doctors wish to educate themselves on all of this, they could always consult Mr. Bush's own Council of Economic Advisers for the ample evidence.
The other familiar objection to a large tax cut proposal will of course be "the deficit." But the Democrats are on both sides of that issue, bemoaning the deficit but already proposing tax cuts and more spending of their own. Mr. Bush has already summed this up perfectly, saying in November that "we have a deficit because revenues are down. There are two things we can do about that: One, stimulate the economy to create more revenues, and two, hold down spending."
Faster economic growth is how you reduce deficits, and tax reductions are how you foster growth. It worked for President Kennedy in the 1960s and President Reagan in the 1980s. If the war against terrorism requires higher spending for defense or homeland security for some years, then the public will understand that higher deficits are tolerable during these times.
Now, these leaks are coming out before Mr. Bush has made up his mind, and the President is probably the most ardent tax cutter in the White House. But we'd feel much better if his aides were at least making the right arguments instead of aping Democratic complaints in unattributed remarks to reporters. These leaks are a bad omen for the tough debate to come, and they represent an embarrassing start to the new Bush economic team of Stephen Friedman and his chief White House sponsor, Joshua Bolten.
In any case, compromising with yourself before even getting to Congress is idiotic. Mr. Bush will have to give Democrats something if he wants their votes, but the time to do that is when he cuts the final deal. If Mr. Bush takes the advice of his leakers, he may end up with a proposal that is both economically meaningless and politically feckless. If that's all the tax cut he's going to propose, we'd recommend he forget about it and save his political capital for something else, like Social Security reform.
