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The Journal’S Snow Job
The Treasury secretary is on board with the full Bush tax cut.


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Larry Kudlow

The Wall Street Journal got it wrong on Monday when a page-one story suggested that Treasury Secretary John Snow is ready to compromise on President Bush’s tax-cut plan. A senior advisor for Bush staunchly countered this claim, telling me that “the president is going for as big a tax cut as he can get with 100% of the key policy elements.” The advisor added that the Bush team is “100% behind John Snow.”

As they should be. The president is likely to get a large chunk of his big-bang tax reform because Snow has explained it so eloquently, and unerringly, in numerous public and media forums this year. It’s baffling how the Journal got his message so wrong.

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According to a senior Treasury official who sat in on the Journal’s interview with Snow, the Treasury secretary responded to a hypothetical case where a 50% dividend exclusion would be more amenable to a $550 billion tax-cut package — rather than the administration’s original proposal of $725 billion. But Snow characterized this as only “one possibility” to reporter Bob Davis.

On another contentious point, it was Davis — not Snow — who suggested a delay in cutting the top individual marginal tax rate from 38.6% to 35% while accelerating the other income-tax rates. In fact, according to my Treasury source, Snow at least twice told Davis, “I don’t like that idea.”

When Davis noted Snow’s view that a top rate cut would benefit small-business owners, he quoted Snow saying, “This [top-rate] cut has so much oomph to it, in terms of immediate impact to the economy.” But when Davis wrote that Snow “suggested the top rate could still be phased in” at a later date, he did not support the statement by directly quoting Snow.

All this controversy stems from a recent deal by Senate Republicans to limit the Bush tax-cut proposal to only $350 billion — roughly half the original. This devil’s pact — struck with senators Olympia Snowe and George Voinovich — was agreed to by Majority Leader Bill Frist, Budget chairman Don Nickles, and Finance Committee head Chuck Grassley. Considerable friction has since developed between Republicans in the House and Senate.

On ABC’s This Week, Grassley said that while he would be willing to vote for a much higher tax-cut, he made the deal with Snowe and Voinovich (dubbed “Franco Republicans” in hard-hitting ads from Club for Growth) in order to secure the necessary votes for a budget resolution that sets spending and revenue targets. Importantly, such a resolution requires only a simple one-vote majority to pass a tax cut, not a 60-vote majority.

More, the new $350 billion tax-cut limit applies only to bills coming out of the Senate Finance Committee and voted on the Senate floor. The Grassley deal will not apply to a House-Senate conference for the final tax cut where the tax number could be as high as $550 billion, an amount supported by the president.

The president’s jobs-and-growth proposal is not the deficit-busting item that Beltway pundits and Democrats claim it to be. The Congressional Budget Office estimates that federal tax revenues will be a mind-boggling $29.8 trillion over the next eleven years. Hence, the proposed tax cut will come in at a mere 2 1/2 percent of federal revenues during this period. The CBO also projects a whopping $155 trillion increase in gross domestic product over this span, making the revenue impact a mere one-half of one percent of estimated GDP.

Numerous forecasts suggest that the Bush plan will add a full 1% to GDP growth over each of the next five years, creating 1.4 million new jobs annually during this period. It is also likely that the combination of lower taxes and higher investment returns — including incentives for small businesses to invest — will generate sufficient economic growth to reduce the estimated cost of the package by at least one-third.

Class-warrior Democrats say the plan will only benefit “rich people,” but the real winners will be regular workers. A greater supply of capital investment will raise productivity, leading to higher real worker wages, modernized equipment, and more on-the-job training. Remember, two of three voters today own stocks, and one of every two families are shareholders.

Congress will reduce the size of the pending tax package to roughly two-thirds of the original, so the White House will ultimately settle for a 50% dividend tax exclusion, with the rest phased in over time. But President Bush has said again and again, “I’ve learned never to negotiate with myself, because then I will lose.” Look for Bush and his strong Treasury man to stay on message and keep up the drum-beat for their post-war tax-cut plan. In the end they will get more than Beltway pundits believe, thereby benefiting the economy and the global war on terrorism enormously.

Mr. Kudlow is CEO of Kudlow & Co.



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