From Wall Street to the Washington Post, the financial establishment has declared that President-elect George W. Bush’s plan to reduce marginal tax rates is dead on arrival. Razor-thin Republican margins in the House and Senate will never be able to pass broad-based tax cuts, we are told; preserving massive budget surpluses is a more important priority. Conventional economic thinkers somehow believe that tax money transferred into government hands is more productive than money left in private pocketbooks. Even former GOP standard-bearer Bob Dole argues that Bush should quickly abandon his tax-relief plan in order to promote bipartisan cooperation — even though, in 1996, Dole himself ran on a plan to lower taxes by 15 percent.
But the most powerful mandate for bipartisan tax cuts may come from the need to remedy a steadily weakening economy. This year’s sinking stock market — the worst since the bear-market recession of 1990-91 — is an economic red flag. Revised figures for third-quarter GDP came in slightly above 2%. Car, computer, and home sales are slumping, industrial manufacturing may already be in mild recession, early holiday sales are slower than last year, consumer confidence is faltering, and estimates of future business profits have been halved.
Meanwhile, the much-ballyhooed federal budget surplus — which is coming directly from record personal tax payments — is acting as a fiscal drag on the economy. While individual tax collections increased $144 billion over the past year, personal savings fell $138 billion. So while the growing tax bite is filling government coffers, it is draining consumer spending and saving. Add to this the tax-hike effect of higher energy prices, and it’s not hard to understand why 6 percent growth is nosediving toward a meager 2 percent pace. Excessive budget surpluses are draining purchasing power and vitality from the private-sector economy.
Team Bush should make the case right now, during the transition period, that 2 percent economic growth in the new information economy is unacceptable — it’s a virtual recession. During the campaign Bush agreed with Fed chairman Alan Greenspan that 4 percent growth is a suitable target. The Fed should do its part by relieving excessively tight liquidity conditions. But while the central bank can create money, it cannot produce goods. Increased saving, investment, and production require lower marginal tax rates to replenish economic-growth incentives and restore private-sector purchasing power. This should be communicated as neither a Republican proposal nor a Democratic proposal, but rather a prosperity plan in the nation’s economic interest. By establishing growth as his first priority, President-elect Bush can cross party lines to build a bipartisan mandate to govern on the economy and other related domestic issues.