There’s Still Time!
It’s not too late to fix the tax bill.

Mr. Moore is president of the Club for Growth
May 22, 2001 9:00 a.m.

ig 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.