The president loved the idea. A Reaganite in his economic as well as his foreign-policy views, Bush has nurtured the supply-side notion of eliminating overtaxation since his Texas governorship. He had pounced on dividends the previous August when Wall Street discount-broker king Charles Schwab proposed it at his Waco economic summit. Corporate dividends are taxed once when companies hand them out and again when investors file tax returns. Ending this was basic “fairness,” as one official termed it, and Bush promptly pitched his $674 billion package to the nation that way.
The surprise size of the 10-year plan–it is nearly twice as large as even his allies had expected–was also in character. Here, once again, was the Bold Bush, the president’s most effective leadership pose. When you’ve got political capital, spend it aggressively on all fronts: voters are inspired, enemies run for the hills. Hence, the same week he dropped his tax bomb, Bush brazenly renominated Charles Pickering, whom Democrats have accused of being racially insensitive, to the federal appeals court. The president, convinced of Pickering’s integrity, shrugged off his party’s trial by fire over ousted prospective Senate Majority Leader Trent Lott’s quasi apology for segregation just before Christmas. On the tax plan, most thought Bush would merely cut dividend taxes by half, rather than call for a full $300 billion giveback. But this was about principles, says one senior administration official; the president “clearly understood: if the double taxation was wrong, then why [would keeping half of it] be right?” Similarly, Bush went for a full acceleration of 2001 tax cuts for all income earners, making them effective in 2003 rather than 2004-06.
But as Bush is finding in so many areas–like confronting an “Axis of Evil,” North Korea and Iraq, which demands very different remedies–there is little clarity in governance and even less moral truth. Especially when it comes to the nation’s tortuously complex tax code and how best to grow the economy (or even whether the government should try). Democrats, who are desperate for a victory after two years of humiliation at Bush’s hands, weren’t the only ones critical of the plan. Some of Bush’s fellow Republicans were just as surprised by his focus on investor dividends as the plan’s centerpiece. Sen. George Voinovich, a defi-cit hawk worried about the pileup of a $340 billion deficit he projects by next year and “$5 trillion in debt” within 10 years, told NEWSWEEK flatly, “I don’ t think there’s any way they’re going to be able to get away with this.”
In a 51-49 Senate, Bush needs every vote. But Senate Finance chair Charles Grassley cast doubt on the plan’s prospects, and moderate Republican Sen. Susan Collins wondered why the dividends fix was jammed into a growth package rather than “a tax-reform bill.” When Dan Crippen, the recent head of the Congressional Budget Office (and a GOP loyalist), was told that Bush’s senior advisers were purportedly unanimous about targeting dividends, he said: “That’s somewhat hard to believe.” Democrats pounced: reborn as fiscal hawks since the Clinton years, they pre-empted Bush by a day and offered an alternative one-year stimulus that was far less costly at $136 billion and more attuned to workers. They also gave $31 billion to resource-strapped states, whom Bush ignored.
All in all, Bush’s economic plan represents a giant roll of the dice with his political future. It depends largely on a supply-side leap of faith: the still-controversial idea that tax cuts will bring enough growth to wipe out the deficits Bush is accumulating. But in being bold, he could also be blamed if things don’t improve. Wall Street, the plan’s immediate intended target, staged a minor rally, but it may have been damning with faint praise. The market should have reacted far more dramatically if, as the Bushies said, this plan was going to succeed and stimulate investors, noted one worried GOP official. (By late last week, even the White House had scaled back its market-growth estimates to less than 10 percent.) And as the economy hemorrhages jobs–as of last week an additional 100,000 were gone, making the total 1.7 million jobs lost on Bush’s watch, the worst for a president’s first two years since 1981-82–whoever becomes the Democratic nominee in 2004 is sure to ask the Reaganesque question: are you better off now than you were four years ago?
Many Americans, as of now, would have to say no. That’s hardly Bush’s fault, as he constantly reminds voters: the dot-com implosion and 9-11 are more to blame for the enervated economy. But it does help to explain the slate of fresh-minted Democratic presidential candidates last week (Sen. John Edwards and Rep. Dick Gephardt, who joined the already declared Sen. John Kerry and Gov. Howard Dean). Even last week’s surprise 2004 dropout, Senate Minority Leader Tom Daschle, said he mainly wanted to focus on leading the fight against Bush’s economic mismanagement. Gene Sperling, the Clinton economic adviser who is now coaching many in the Democratic field, says: “The driving premise is fundamentally a supply-side trickle with symbolic gestures toward the center.”
Bush’s economic plan is, in truth, less a purist’s approach than a potpourri of ideology and pragmatism. Tagged onto the dividend cut were a marriage tax break and an accelerated child tax credit that are expected to spur some growth. And Bush opted not to do what many economists said would most likely boost the market: directly reducing dividend taxes on corporations, rather than eliminating them for investors (many of whom won’t spend the extras). A former administration official concedes politics–avoiding the appearance of giving breaks to corporations in the wake of Enron, WorldCom and Tyco–was mainly behind this decision. Adds Dan Mitchell of the conservative Heritage Foundation: “George Bush is the biggest supply-sider in the White House, [but his political guru] Karl Rove wants to see him elected.”
Removing the double dividends tax has a long supply-side lineage dating back to Ronald Reagan’s tax-reduction revolution. Relegated to the wilderness in the Bush I and Clinton years, supply-side orthodoxy became part of Bush’s first attempt to reform Texas’s tax structure in 1997. That effort attracted the attention of Washington’s supply-siders, especially Charls E. Walker, a former deputy Treasury secretary who had headed Ronald Reagan’s 1980 tax task force. Walker became a key Bush tax adviser, and his influential tax-cutting lobbying group, the American Council for Capital Formation, hired a young economics professor named Glenn Hubbard. A decade ago, in the last Bush administration, it was Hubbard who co-wrote a major study on scrapping dividend taxes. But that plan failed to take off when Bush senior lost the support of business and his conservative base by breaking his 1988 “read my lips” no-tax promise.
No surprise, then, that Hubbard has emerged as the new plan’s leading champion, and that it was partly designed to excite Bush’s conservative base. This helps to explain, too, why Lindsey was fired last December in favor of Stephen Friedman, the Goldman Sachs former co-chairman who is Bush’s new chief economic adviser. While Friedman was recently part of the Concord Coalition–which also opposes the Bush plan as fiscally irresponsible–he’s now badly needed as an emissary to Wall Street. An administration that used to dismiss the idea the Street could be influenced is suddenly resting its hopes that a resurgent stock market will spur the economy, and Friedman was dispatched to win over the Street’s big hitters. Bush’s new embrace of Wall Street also helped to explain the abrupt December ouster of O’Neill, who had been anathema among traders.
The incoming Treasury secretary, John Snow, a former railroad exec, is a practiced salesman and will need to be one now. While the White House pitched its plan as a model of equitability, tax experts tended to support the Democratic view that it was tilted to the rich. “There is a bias toward more-affluent taxpayers,” says Sanford Millar, a California tax lawyer. Hubbard, in fact, has long sought to aid America’s entrepreneurial class, which he once identified as half of the richest 1 percent in the nation. Sensitive on this point, Bush initially considered inoculating himself from Democratic criticism by accelerating only tax cuts for low- and middle-income Americans. But he feared another “bruising fight in the family” among conservatives, said Stephen Moore of the supply-side Club for Growth. Even so, it is low- and middle-income consumers who generally spend tax windfalls in the short term.
The Bush plan sharpened the differences between Democrats and Republicans, which had become blurry of late. Hence the new talk about “class warfare.” And that’s just fine with the president’s most fervent supporters on the Hill, mainly Tom DeLay. The new House majority leader, who loves nothing more than a partisan battle, talked about tacking more onto the Bush plan, endorsing a plan for capital-gains cuts. “He’s being intentionally provocative,” says a DeLay aide. “He’s trying to establish a position so that we end up somewhere around the president’s number.” Some GOP senators, like Collins, said the states would have to get money. “I had heard there was going to be $10 billion” from the White House, she said. “I suspect it was pulled back for a bargaining chip.” To win, Bush may need all the chips he’s got.
