A tax-cut battle royale is shaping up in the White House, with President Bush’s economic team divided over which measures will best strengthen incentives for economic growth and stock-market investment.
Economists Larry Lindsey and Glen Hubbard continue to favor a broad-based tax-cut package that would boost stock-market values and increase after-tax cash flows for businesses and families. Those two made similar arguments a year ago, but they were overruled by Paul O’Neill and Mitch Daniels — the Bush advisors who favor a much more austere economic strategy based on deficit reduction.
Treasury Secretary O’Neill has never been a friend of supply-side economics. He’s illustrated this by way of numerous hip-shooting comments since joining the Bush team. Though he professes to favor a thorough overhaul of the corporate tax code, perhaps even its elimination, his position is much more narrow, and smacks of social engineering. At a time when deep cuts are receiving deep attention, O’Neill is appealing for very light, targeted tax relief, such as child tax credits and reductions in the marriage penalty. More, he has never set a detailed economic blueprint down on paper. He’s all talking points and no package.
However, the bigger disappointment is the recent thinking of Daniels, Bush’s budget director, who has seemingly moved from the supply-side camp to the deficit-obsessed camp. He has failed to take advantage of several public opportunities to forcefully advocate an investor tax-cut package, and he’s too quick to point out the deficit pitfalls of broad-based tax relief.
Of course, key White House decision-makers, including the president, have not yet weighed in. As is the case in so many areas, Vice President Dick Cheney’s view on a tax package will be crucial. Cheney’s top staffers are enthusiastic about broad-based tax cuts. In fact, they like Ernest S. Christian’s “five easy pieces” proposal that is now circulating through Washington.
Christian, a veteran Washington tax reformer, believes that fundamental reform encompasses lower marginal tax-rates, 100% first-year expensing of business-equipment purchases, and a major expansion of Roth IRAs that permit after-tax savings deposits that are never taxed again. The other two pieces of his plan include a reduction in the double tax on corporate dividends by equalizing the treatment of debt and equity, and measures that would exclude U.S. exports from double taxation overseas.
Other welcome ideas making the rounds include the elimination of the alternative minimum tax, ending the inheritance tax, expanding the investment loss deduction for stock-market investors, and equalizing the capital-gains treatment of stock-market equities and residential real estate.
Our corporate chieftains are also chiming in — finally. In a remarkable speech to the U.S. Chamber of Commerce, FedEx CEO Fredrick W. Smith distanced himself from the usual Business Roundtable whining and hand-wringing when he advocated a specific program of business deregulation — including litigation reform to counter excessive class-action lawsuits — along with supply-side tax cuts. He also envisioned a new capital-gains tax schedule that includes the current 20% rate for assets held for one year, then a new rate structure that drops off 5% a year to zero after a five-year holding period.
The ideas are all out there. And with continued indecision in the White House, Sen. Don Nickles may well become the key player who tips the policy scales toward deep tax cuts.
Nickles, a veteran senator long committed to lower tax-rates and firm government-spending restraint, has given up his post as deputy majority leader to assume the chairmanship of the Senate Budget Committee. In this new capacity he may organize a huge budget-reconciliation package that will include new tax-cut measures and (conceivably) prescription-drug entitlement reform. Such a reconciliation package will require a simple one-vote majority on the floor of the Senate.
Rep. Jim Nussle, Nickle’s counterpart in the House, agrees that a reconciliation approach can overcome potential tax-cutting roadblocks in the complicated legislative process. Both men also favor a dynamic-scoring metric to properly account for the positive growth effects of reduced tax rates on expanded national income.
If Sen. Nickles can gather solid backing from his conservative-leadership colleagues — Mitch McConnell, John Kyl, Rick Santorum, and Majority Leader Trent Lott — the Oklahoman may bring President Bush on board for a meaty pro-growth tax package. As for certain weak-kneed members of the president’s high-economic command, they won’t know what hit ‘em.
Two years ahead of the presidential election, Sen. Don Nickles may hold the key to a major stock-market rebound and a strong economic revival.