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Streamlined But Sturdy
The White House is looking at three tax-cut options.


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Larry Kudlow

President George W. Bush gave a much-needed speech Tuesday in the Rose Garden of the White House. The stock market rallied — at least temporarily — as it heard the president’s firm commitment to not only protecting America from foreign terrorist dangers, but to fighting hard for a tax-cut package that will grow the economy, increase investment, and create new jobs.

“A free Iraq,” Bush said, “will be an example of reform and progress to all the Middle East.” But he also made it clear that he has reform and progress in mind when it comes to the economy and job creation at home. In particular, he was emphatic that more investment will create jobs, and with this logic he firmly reiterated his desire to remove the double tax on dividends. “Taxing corporate income once is fair,” he said, “but it is not fair to tax it twice.”

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On the dividend-tax-cut proposal, which remains the centerpiece of the president’s plan, the White House is now looking at three options — a result of the reality that the final congressional tax package will probably come in around $450 billion.

First, there’s a 100% dividend exclusion, priced at $345 billion in static revenue terms. But this option now seems less likely as a result of opposition in the Senate. A second, and more plausible, possibility is a 50% dividend exclusion, priced around $250 billion. But a third idea, taxing dividends at the same marginal rate as capital gains, would cost about the same.

House Ways and Means chair Bill Thomas (R., Calif.) is considering bringing dividend tax rates in line with capital-gains rates at a basic rate of 18%. This would carry a ten-year price tag of only $10 billion for a slight decline in the 20% cap-gains tax. On dividends, this would effectively reduce the tax rate to about half of the top personal income-tax rate, which is used to levy dividends. That rate is now 38.6%, but it is scheduled to slip to 35% in the president’s package.

Additionally, House and Senate tax writers are moving toward boosting the cash bonus for faster business depreciation write-offs. The bonus passed a year ago was a temporary 30%, but it could now go to at least 50%.

Should a 50% dividend exclusion or a new tax-rate parity between cap-gains and dividends be put in place — along with lower personal tax rates, marriage-penalty relief, a higher tax credit for children, and more liberal write-offs on equipment expensing for large and small businesses — this streamlined tax-cut package would still deliver the desired economic results: more capital formation, investment, and consumption.

Numerous estimates from the government, think tanks, and Wall Street suggest that this sort of package might add nearly 1% to the annual growth of gross domestic product — the Congressional Budget Office now estimates that GDP will rise by a whopping $150 trillion over the next ten years — and also create roughly one and a half million new jobs each year through 2007.

While the president may not get all he’s asking for, this would still be quite an achievement. It would also mark the third tax cut passed thus far by George W. Bush — a far cry from his father’s economy-retarding tax-hike policy twelve years ago.

A recent NBC News/Wall Street Journal poll shows Bush with a huge 71% approval rating right now. On tax policy, respondents had more confidence in Bush and the GOP (52%) than in congressional Democrats (38%). It seems that the president’s political clout, even on taxes and the economy, is greater than many media pundits would have us believe.

The White House is now putting together a series of presidential speeches to sell the tax-cut package. This could even include a special session of Congress where Bush would announce the formal end of the Iraq war and make the case for tax cuts. Essentially, the president intends to go over the heads of congressmen and communicate directly with the public in the hope that grassroots voters will pressure elected representatives for a big economy-boosting tax cut. This sort of strategy was used successfully by President Reagan in the 1980s when he slashed the top income-tax rate to 28% from 70%.

Beltway commentators continue to underestimate Bush’s political prowess, but he remains committed to his big-picture goals of international peace and freedom as well as domestic prosperity. As the president progresses on each front, a landslide victory in next year’s election looks more and more likely for Bush and the GOP.

Mr. Kudlow is CEO of Kudlow & Co.



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