The inside-the-Beltway media kept telling us that President Bush’s tax bill was doomed to failure. But the Texan’s determination to accelerate economic growth by lowering taxes across the board won over Congress. It came down to the wire, but victory was pulled from the jaws of defeat.
And it’s quite a victory — the third-largest tax-cut bill in American history, with economic-growth incentives galore. It slashes investor dividend taxes, accelerates personal income-tax cuts, increases capital-investment expensing for large and small businesses, and even reduces the tax on capital-gains.
On the eve of the victorious vote, Democratic presidential front-runner Joe Lieberman tried to argue that insufficient front-end tax-cut loading would leave the economy limp. But leading financial reporters pointed out that $260 billion in tax cuts will flow into the pockets of individuals and businesses for the next 18 months. GDP in this period, it was estimated, will rise a full 1 percent — more than would have been the case otherwise.
This tax cut is a stellar achievement.
Using a very laid-back, Reaganesque-style of salesmanship, George W. Bush stayed on-message through a contentious period. At any one snapshot moment it looked like congressional support was crumbling and key components of the tax package were being dismantled. But Bush understood that Main Street taxpayers will spend their money more wisely than government will. So he went over the heads of lawmakers, and told the country, “I want to put more money in your pockets.”
The economy is growing, he said, but it is buffeted by war, terrorism threats, energy shocks, and corporate malfeasance. Tax cuts, he argued, will expand the economy more rapidly and in turn bring down unemployment. He also stressed the unfairness of taxing the same dollar of corporate profits twice, once as business income and again as investor dividends. Finally, he said, only tax-cut-driven economic growth will solve the deficit problem.
Bush paid little attention to public-opinion surveys that showed relatively lackluster voter support for his tax measures. Instead, he decided to lead rather than follow. He believed that voters will ultimately support him, and his economic-growth efforts, come election time next year.
So, Bush stuck with every supply-side-pariah in the bill — including tax cuts on cap-gains, top personal rates, and investor dividends. This completely dissed Democrats who screamed like stuck pigs over “tax cuts for the rich.”
But liberal Democrats in Congress and on the presidential campaign trail never got traction on their class-warfare arguments. While voters may not have been overly enthusiastic about the Bush plan, the president’s numerous trips to the hinterland showed that the American electorate is in fact very enthusiastic about the president himself, and his unwavering leadership in Afghanistan and Iraq.
Once again, the pundits were wrong. Bush’s wartime popularity did in fact spill over into the tax-cut agenda. A month after the president spoke to the troops on that aircraft carrier off the San Diego coast, he won the war on tax cuts.
What you’re watching is Bush at his most relentless. He’s refusing to back off. He is leveraging the economics of investor-class tax cuts in order to strike at the very heart of the Democratic worker base — which includes blacks and hispanics. Although the Democrats don’t yet get it, capital-forming investor tax cuts will lead to higher real wages for the middle-class worker. These workers vote, and a swelling number will know who to thank.
This is an incredible bridge that Bush is building deep into Democrat territory. It’s a bold strategy with tremendous political ramifications. The Bushies seem to know the numbers — economically and politically.
As stock markets rallied in support of the capital-forming incentives of lower dividend and capital-gains taxes, it became clear that the investor class — where one of every two families owns stocks, and two of every three voters owns shares — was aligning with Bush and against his liberal naysaying critics.
But at the end of the day, it will be the middle-class American worker who will benefit most from the pickup in capital formation brought on by Bush’s latest tax cuts. Investors will respond to fresh economic incentives, and a new flow of capital will generate stronger markets, a true business expansion, higher productivity, more jobs, and — perhaps most importantly — outsized gains in real worker wages.
This most underrated of politicians has once more stuck it to his liberal adversaries. And he may do it again in September by proposing expanded tax-free savings accounts and a total elimination of taxes on investor dividends.
Democrats, meanwhile, remain caught up in their own internecine interest-group battles. They still seem not to understand that on the issues of war and taxes the brilliant President Bush is dooming them to minority-party status.
— Mr. Kudlow is CEO of Kudlow & Co.