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How they shrunk the tax cut
By W. James Antle III
The recently passed tax cut is something of a victory for the American taxpayer and also President Bush. Rebate checks will soon be in the mail, marginal income tax rates will reverse their decade-long ascent and begin to fall for the first time since 1986, the marriage penalty and the confiscatory death tax are to be eased - and most importantly, resources are to shifted from the government to the wealth-producing agents of the private sector.
It is a much smaller tax cut than the American people deserve and perhaps than the economy needs, but it is also significantly larger than anything the Democrats had previously been willing to accept and is still too large for the party leadership. Nevertheless, President Bush accomplished this tax cut with bipartisan support. In the Senate alone, 12 Democrats and Jim Jeffords joined all but two predictably incorrigible Republicans in voting for the compromise tax cut. In addition to offering mild relief to taxpayers and a modest jolt to the economy, this tax cut enhances the president's political capital as the Senate moves into Democratic hands.
Yet this is not the unqualified victory it could have been. The tax cut should have been much larger and it should come to pass much more quickly, to avoid future Democratic nullification prior to its pro-growth aspects even taking effect. It is appropriate for Republicans and the Bush administration to derive some satisfaction from this tax cut, but they also must contemplate the things that went wrong on the road to tax relief.
As both sides of the tax debate never tire of telling us, this is a $1.35 trillion tax cut. This is a reduction from the $1.6 trillion tax cut President Bush initially sought, which like the third bowel of porridge he insisted was "just right." Question: How large was the dollar amount of the Reagan tax cut in 1981? Although it has today saved taxpayers more than $2.5 trillion, no uniform figure can be assigned to how large a tax cut it was supposed to be a decade ago. This is precisely because the Reagan administration wisely did not sell their tax package in terms of the size of its dollar amount. Instead, the centerpiece of President Reagan's proposal was the 30 percent across-the-board reduction in marginal rates originally proposed by Jack Kemp and Sen. Bill Roth.
By fixating on dollar amounts, Bush defined his tax cut in terms of foregone revenue and as a percentage of the budget surplus. This was his weakest suit. Democratic critics of lower tax rates argued that the projected budget surpluses may never materialize and that tax cuts could return us to budget deficits. However, the exact dollar amount of any tax cut like Bush's is unknown. That it would cost $1.6 trillion assumed that taxpayers would not modify their behavior in response to lower tax rates and that there would be no revenue "re-flow" due to increased economic activity. It may be the case that the budget surpluses would not have been as large as $5.6 trillion over the course of ten years. It is equally likely that the actual "cost" of the Bush tax cut would have been less than $1.6 trillion.
As Bush's own economic adviser Larry Lindsey has demonstrated, the Reagan tax cut cost one-third less than static projections anticipated. For every dollar of revenue lost, the tax cut stimulated $3 in additional economic growth - economic growth that created new personal wealth and raised living standards. Not only would such growth alter the amount of revenue actually lost by cutting taxes, it would improve the chances of the budget surpluses reaching their projected levels since these projections were themselves dependent on growth.
Bush should have sold his tax cut by promoting individual aspects of the plan likely to be popular and made the rate cuts its centerpiece. By insisting on a specific dollar amount for his tax cut, Bush placed his proposal in direct competition with a whole host of federal spending projects and the budget surplus. Worse, he put himself at the mercy of those who score tax cuts without regard to their behavioral responses from taxpayers and will portray any such proposals in the most negative - even if least accurate - light.
Another critical mistake was setting a ceiling on tax relief rather than simply a floor. President Bush insisted that his tax cut be no smaller and no larger than $1.6 trillion. This was despite the fact many Republicans, including House Majority Leader Dick Armey (R-Tex.), and the nation's leading conservative commentators were wiling to endorse much larger tax cuts. In fact, many questioned whether even the full Bush tax cut was adequate to enable the economy to resume its growth potential. By conceding that the tax cut should be no larger than $1.6 trillion at the same time he was moving the Democrats in the direction of increasingly large tax cuts, Bush insured that it would be smaller than $1.6 trillion.
This is an especially devastating miscalculation in light of the fact that Bush at one point had all 50 Republicans (then including Jeffords) and Sen. Zell Miller (D-Ga.) willing to at least contemplate the full tax cut in exchange for a variety of compromises. (Some of which may have been acceptable, others unacceptable.) But placing any ceiling on tax relief obviated any floor he would choose to observe, and shift the dynamic to reducing the tax cut's overall size. If Bush had been willing to entertain tax cut proposals in excess of $2 trillion, or better yet not define his tax cuts in terms of dollar amounts but favor the inclusion of deeper rate cuts or cuts in other taxes, the final package would have been much closer to the original proposal. Perhaps if Republicans had been willing to utilize the support of a number of Democratic senators for capital-gains tax cuts, it could have even been larger.
Republicans also did a poor job refuting allegations against the Bush tax cut that were based on methodologically flawed analysis. In the case of the proportion of the tax cut that would go to the top 1 percent of earners, this was based on anticipated rather than actual income. Paul Craig Roberts described an even more egregious example in his syndicated column. A Democratic House Ways and Means staffer calculated that cutting the estate tax would increase avoidance of income and capital gains taxes, persuading the Joint Tax Committee to increase the projected "cost" of the death tax cut by 61 percent. This padded the dollar amount of the tax cut, which Bush found so important, by some $250 billion. So much for only supply-siders maintaining that changes in tax policy affect the actions of taxpayers.
This is not to belittle the importance of cutting taxes. Unlike his father and Bill Clinton, who raised tax rates, and following a decade of unlegislated tax increases via "real-income bracket creep," President Bush's efforts have resulted in welcome legislation. It will increase incentives by lowering rates and will put money currently in the possession of the government back into the private sector to be used more efficiently. But it could have been far larger and had a far greater impact without requiring anything more radical than what the Bush White House is realistically capable of.
Now that they have the Senate, the Democrats have already indicated they will seek to reverse parts of the tax cut. If Bush and the congressional Republicans can learn from their mistakes, they can preserve the tax cut they just won and perhaps make it larger.
W. James Antle III is a former researcher for the Rhema Group, an Ohio-based political consulting firm. You can e-mail comments to firstname.lastname@example.org.
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