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tax-cut legislation in Washington comes along on average about once
a generation, so it's crucial that when one
does come along, we get it right.
The $1.3 trillion tax bill that will apparently make its way to
President Bush's desk in the next week or two, alas, has one monumental
defect. The tax plan provides too little tax reduction too late
to help the economy any time soon. This is a problem that I and
others have been blaring with a megaphone to the White House and
the congressional leadership since the tax debate started back in
January.
Apparently, no one is listening. The tax bill has gotten less economically
stimulative, smaller, and more back-end loaded as it has meandered
its way through Congress. What Congress is about to pass is a tax
bill that would be terrific for America if we were living in 2011.
But, of course, this is not 2011. This is 2001. And in 2001 the
economy and the stock market are ailing. But the data below shows
that the tax cut does not provide much juice for the economy until
about 2005. A supply-side tax stimulus is needed right now —
not in 2005 and beyond.
This bill is not just the wrong medication for the economy. It is
also politically bone-headed. In 2002, the Republicans must try
to hold precarious majorities in the House and Senate in crucial
midterm elections. In 2004, Bush must run for reelection. In other
words, Republicans will face voters twice before having provided
almost any short-term tax-policy changes to enhance capital investment,
saving, risk taking, or job creation.
Now it is certainly plausible that the animal spirits of the information-age
economy, with some useful prodding from the accommodationist Federal
Reserve policy of late, may muscle the high-tech and manufacturing
sectors back into shape even without any tax-cut stimulus. The economy
may soon roar back to life, in which case the Republicans will be
home free.
But what if it doesn't? What if the economy remains stalled and
the stock market continues to slip into bearish territory? Investor-class
voters are not going to be happy campers. Under a bearish scenario
the political implications are almost 100% predictable: Congressional
Republicans will get wiped out in 2002. Bush may be evicted not
long thereafter. And they will get tossed out because of their failure
to rescue the economy when they had the opportunity to do so.
Why, for heaven's sake, take that chance?
The White House has become so obsessed in recent months about whether
the tax cut will be $1.6 trillion or $1.3 trillion or $1.2 trillion
over the next 11 years, they've lost sight of the most crucial policy
issue of all: What does this do for the economy over the next 18
months? As currently drafted, the tax bill provides just one microscopic
supply-side stimulus to the economy before November 2002. It nicks
the top tax rate down from 39.6% to 38.6%. And then there is no
further reduction in the highest tax rate until 2005. That's what
all the hullabaloo is about? This has about as much chance of hotwiring
the economy as a butter knife has of cutting down a mighty oak tree.
Now it's certainly clear that the anti-growth Democrats in Congress
constitute an imposing obstacle to the Republicans' passing even
a mildly stimulative tax bill. The Democrats have become so ensconced
in class-warfare ideology that they are now seemingly genetically
incapable of endorsing any change in tax policy that would help
the economy. Any change in tax policy that would create prosperity,
might also inadvertently help rich people. Tom Daschle and Dick
Gephardt will have none of that. I recently debated Paul Krugman,
an economist at Princeton and one of the Democrats economic brainchildren,
and I asked him how he would improve the tax bill. His advice: Retain
the death tax and don't cut the top income-tax rates. In other words,
any provision that has the slightest hint of helping the economy
grow more prosperous should be omitted from the bill. Zell Miller,
the one Democrat who has consistently supported tax cuts this year,
recently chastised his colleagues noting that they are "is no longer
the party of pro-growth tax cutting as it was under JFK." Tragically,
he is right.
So all of the heavy lifting is going to have to be done by the Republicans.
More heavy lifting is needed. What is needed is a real political
and economic victory on the tax bill, not the appearance of a victory.
Sometimes the GOP political operatives get these two things confused.
Now, for the good news: There is time to repair this tax bill, and
inject a supply-side stimulus into the economy pronto. And there
is a way to do it so as not to crowd out other important features
of Bush's original plan.
Last week, Larry Kudlow, Arthur Laffer, and I argued in the Wall
Street Journal for a three-year capital-gains tax cut to 15%
effective immediately. Senators Allard of Colorado and Gregg of
New Hampshire have sponsored an amendment to do just this. The White
House response has been ho-hum. What the administration needs to
recognize is that the capital-gains cut is the one tax change that
could almost immediately rally the stock market, stimulate capital
investment, and reverse the drought in venture capital funding that
is dragging down the high-tech sector of the economy. To do this
will cost virtually nothing in terms of lost revenue. It is virtually
a FREE tax cut that will do a world of good. It is an insurance
policy against recession, and that's a policy that every Republican
up for reelection in 2002 should gladly take out.
Whether
it is fair or not, this is the George W. Bush economy, stupid. Passing
a tax bill with delayed tax cuts in 2005 and beyond puts both the
economy and the GOP in needless peril.
Fix it in the House-Senate Conference by getting more tax relief
and rate reduction up front and by demanding a capital-gains cut.
This will require President Bush to fight for further cuts and even
risk defeat. He will need to stand off the class-warfare rhetoric
that will be thrown in his face. But he will prevail, because Americans
want a tax cut now, not five years from now.
This fight will give Bush and the Republicans a victory that they
can truly savor.
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