As President George W. Bush ponders education reform and abortion funding, Congress is about to debate a tax-cutting bill introduced by Republican Senator Phil Gramm of Texas and Democratic Senator Zell Miller of Georgia that might be bigger than the tax plan advocated by candidate Bush. Bipartisanship may be bearing fruit after all, although the Democratic leadership has, predictably, vowed to scale the proposed package back substantially.
During the presidential campaign, Mr. Bush suggested cutting all federal income tax rates by 2006. Current rates are 15%, 28%, 31%, 36% and 39.6%; he called for new rates of 10%, 15%, 25% and 33%. He also advocated a gradual repeal of estate taxes, increased deductions for two-income families and higher child tax credits. The Gramm-Miller plan essentially presents the Bush proposals to Congress, but it will undoubtedly be revised and reformulated during weeks and months of Congressional debates and posturing. The Democrats can no longer count on presidential vetoes to support their agenda and consequently they will battle more fiercely for every concession.
On the one hand, there are fears that the U.S. economic slowdown may worsen, and the tax-cutting constituency appears to be growing — despite the fact that tax reductions, as explained by Treasury Secretary Paul O’Neill, would not be in effect before next year and would probably not spur the economy in the very short term. Thursday, Federal Reserve Chairman Alan Greenspan opined that a tax reduction package — while it might not provide immediate economic stimulus — could reassure investors and consumers and help avert a further slide in U.S. growth. Who knows? Some wishful thinkers believe that proposals might be broadened to include capital gains tax cuts, faster depreciation for new business equipment and the expansion of individual retirement accounts and 401(k) retirement programs to provide even more economic stimulus.
On the other hand, Democrats are determined to oppose broad, non-targeted tax cuts and want to direct the bulk of tax relief to middle class families through selective tax credits. They also argue that the tax cut ‘must be affordable and fiscally responsible’ — the new mantra of a party known for spending and more spending.
Against these more ideological arguments comes the common sense of the bill’s co-sponsor: In the words of Senator Miller, ‘right now, our taxes have never been higher and our surplus has never been greater. To me it’s just plain common sense that you deal with the first by using the second’. Unfortunately common sense seems to be the least contagious of political viruses.
Indeed, U.S. taxes have never been higher. As a result of growing wealth and bracket creep, personal tax payments as a share of personal income have attained a post World War II high. Individual tax payments have been rising at twice the pace of personal income, causing the effective average personal tax rate to rise from 14.5% to 15.5% last year alone.
Clearly the Bush tax plan seeks to correct this situation, but fundamentally it pertains to a much more profound agenda which strives to restore economic power and decision making to individuals as opposed to government bureaucrats, regulators and legislators. That is more than common sense; it is a tested and proven verity.
President Bush believes that it should pay to work, to produce and to invest, and that individuals are a more consistently reliable source of growth than governments. He is certainly not very attuned to the world, but his view has the added benefit of supporting an economic model of market discipline and liberalization that the United States and the industrialized nations have been advocating throughout the developing nations for decades.
Recent softness in the United States has had ripple effects, notably in Asia where commitment to market reforms is faltering. Difficulties in Turkey and Argentina are also threatening liberalization programs in those countries. The Chairman of the Federal Reserve Bank, Alan Greenspan, worried aloud in a recent speech in Mexico that ‘any notable shortfall in economic expansion from the exemplary standard of recent years runs the risk of reviving mistrust of market-oriented systems’. The United States cannot provide the world a guarantee against economic slowdowns or recession, nor can it avoid correcting the excesses of its own markets, but it does owe the world an unfaltering belief in the superiority, in most economic situations, of individual as opposed to collective decision making.
President Bush’s instinctive support of these views form the basis of his tax relief plan and portend sound domestic and international economic policy making. Even the so-called rainmaker, former president Bill Clinton, understood this when the Republican-dominated Congress of 1994 forced him to offset his 1993 tax hike with a capital gains tax cut in 1997, an expansion of the super-saver IRA provisions and a balanced budget bill. As his last-minute regulatory orgy confirmed, he did not much change his basic beliefs, but he did recognize the right path and moved away from nationalized health care and increased government intervention when the political markets steered him that way. It is reassuring to see that Bush will stay the road and perhaps convince Congress to accompany him.