The Bush Tax Cuts Are Working
Last year all but one Republican in the House and all but two in the Senate voted for the Bush tax cut. President Bush convinced virtually every member of his party that tax cuts were needed to pump steroids into an economy growing too slowly and creating too few jobs. Now, a year later, even in the face of overwhelming evidence that those reductions in income tax rates, dividend taxes, and the capital gains tax, have stimulated a powerful economic rebound, many of these same congressional Republicans are retreating from the tax cut agenda. Some are even buying into the Kerry Democrats’ argument that taxes were cut too much last year. Even the Republican leadership in the House has shown inexplicable timidity on the important priority of cementing the tax cuts into law permanently (they are currently scheduled to begin phasing out this year) so that investors and business owners can make long-term decisions knowing that the new investment-friendly tax regime is here to stay. This year’s congressional budget plan omits a provision to make tax cuts permanent. Hence, a key priority of President Bush’s economic program has suddenly been left on the cutting room floor. Make Them Permanent So rather than make necessary cuts in runaway spending, which is what caused the deficit to expand to $450 billion this year, an increasing number of congressional Republicans would rather balance the budget by taking tax relief away from middle-income families. For example, Republican Sen. Pete Domenici (N.M.) has proposed that for “our children and grandchildren’s future,” tax cuts should not be made permanent unless they are “paid for.” Worse yet, Republicans in the Senate have now said that the permanent repeal of the unfair and unpopular death tax will have to wait for another time. Death tax repeal was one of the central promises Republicans made when they took over Congress in 1994. A leading House Republican liberal, Chris Shays of Connecticut, recently summarized the new fiscal attitude on Capitol Hill, when he told the Washington Post: “We would be foolish to extend all the tax cuts now.” Actually, it is mighty foolish not to. The tax cuts are working to generate economic growth even more rapidly than President Bush’s economic team imagined. In the nine months since the Bush tax cut took effect, the economy has grown at over 6% on an annualized basis. The stock market has also soared by more than 25%–reversing steep losses since the asset bubble burst in June of 2000. So why are some Republicans backpedaling from a policy that is working? The people who have gotten egg on their faces are not the Republicans who voted for the tax cut, but the critics who assured us that it would cause interest rates to soar while providing no economic juice. Interest rates are now the lowest they’ve been in some 30 years and the growth rate in the 3rd quarter of 2003 was the highest quarterly gain since the mid-1980s. Just as supply-side economic theory predicted, lower tax rates have incentivized wealth-creating activities in the business sector. It is surely no coincidence that the economy pivoted into recovery almost the very day when the 2003 Bush tax cut–particularly the reduction in the capital gains, dividend, and income tax rates–was signed into law. Since May 2003, the stock market has been on a steady climb. Americans for Tax Reform recently calculated that the increased valuation of the stock market since then has created some $1.2 trillion in increased wealth for American shareholders. That’s a high rate of return on the tax cut investment. The 110 million members of the investor class–the group of voters who won the election for Bush in 2000 and the Senate Republicans in 2002–have a lot to be thankful for lately. But they want the Bush tax cut made permanent, as promised. When liberals create new government spending programs, they are always permanent and conservatives have had a frustrating time severing the taxpayer umbilical cord. The only government program that is ever temporary is a tax cut. Both the reluctance of some Republicans to make the tax cuts permanent (the investment tax cuts are scheduled to expire in 2008) and the pledge of the Kerry Democrats to repeal the tax cuts if they take back power, have added a veil of risk and uncertainty to investment decisions–and the markets loathe uncertainty. Long-term investment would be even stronger if these two sources of uncertainty could be removed. The boogeyman of the budget deficit is now paralyzing Republicans from taking bold action on tax cuts. But the surge in the budget deficit in recent years is mostly attributable to the war on terrorism, runaway domestic spending, and the economic recession and stock market collapse, which caused tax receipts to fall for four straight years. But according to economist Larry Kudlow, if the economy were to grow at 3.7% per year for the next decade and Congress simply stuck to its budget diet promises, the budget would be balanced a decade from now. Remember: it was growth and a surging stock market that created the surpluses in the late Clinton years–not tax hikes. Second, Republicans do need to impose spending discipline. The budget has been growing at an 8% clip over the past three years, not including the money for national defense. Senate Appropriations Chairman Ted Stevens (R.-Alaska) recently absurdly complained, “There just isn’t enough money to go around.” Wrong. There is just too much money being spent by appropriators. House Budget Chairman Jim Nussle (R.-Iowa) wants to freeze domestic spending–at least until the Iraq War has been completed. That alone would cut the deficit in half in five years. The biggest economic concern of the public right now is not budget deficits, but financial security and jobs. Sen. John Kerry (D.-Mass.) recently said that Bush’s performance on creating jobs is “the worst since Herbert Hoover was President.” This is patently false, given that we now know authoritatively from the National Bureau of Economic Research that the economic contraction began in the 2nd quarter of 2000, or at least six months before Bush took office. The national unemployment rate of 5.6% is lower than that of almost any European nation and about half the rate in Germany. But Republicans have to take this fight to Kerry by asking: How is Kerry going to create new jobs when his first act as President would be to raise taxes on investors, entrepreneurs, and businesses–the very people who create jobs? He might as well be trying to cook an omelet without eggs. Yet the futility of the Kerry economic program won’t register with voters if Republicans won’t defend their own economic game plan and record. The tax cuts have always been the jewel of the Bush domestic agenda–an agenda that otherwise has made conservatives fidgety with massive new expenditures for such initiatives as the “Leave No Child Behind” education bill and the $500-billion Medicare giveaway. Republicans need to understand that if they allow the tax cuts to expire, the economic recovery may expire, too. The economic performance over the past year–even in the face of a war in Iraq–has been a vindication for the economic power of tax reduction policies. The best is yet to come–that is, if Republicans will simply stick with the program and keep their knees from wobbling.