BUSINESSWEEK ONLINE : DECEMBER 13, 1999 ISSUE
NEWS: ANALYSIS & COMMENTARY

Bush's Politically Correct Tax Plan
Bush's new package is a clever blend. But is it good economics?

Question: Is Republican Presidential frontrunner George W. Bush's proposed $1.3 trillion tax cut a great windfall for struggling working stiffs, as his economists claim; a cop-out on fundamental tax reform, as GOP rival Steve Forbes alleges; or a return to Reagan-era, feed-the-rich ''retronomics,'' as Vice-President Al Gore charges? Answer: All of the above.

Or none of the above? Getting a handle on Bushonomics is a slippery exercise because of the Texan's penchant for packaging his policies to appeal to diverse constituencies. In the case of the big tax cut he unveiled Dec. 1 in Des Moines, he's juggling again--vying for the support of nostalgic Reaganites yearning for bold rate cuts, GOP moderates who still fret about fiscal discipline, and fence-straddling independents awaiting solid signs that ''compassionate conservatism'' is more than a slogan.

Bush's approach rejects the ''junk the code'' mantra of flat-taxer Forbes. The Texan's answer is a package blending marginal rate cuts for the very rich and poor with tax-code engineering on behalf of moderate-income workers. From one angle, it looks like pure nectar for core conservatives. It phases out the two tax brackets aimed at the rich added in '93 by Bill Clinton, making the rate landscape look more like it did during the Reagan era.

But look again. Candidate Bush is ignoring two tax goals dear to the right: a cut in capital gains and the kind of across-the-board reductions supply-siders crave. Instead, he's got a phased-in plan that costs a projected $483 billion over five years and cuts rates most for those in the bottom bracket--novel for a Republican. He also boosted breaks for education and kids in ways meant to help working families.

''It's pretty much inevitable that [under marginal rate cuts] the richest people are going to garner the lion's share,'' notes former Clinton economist Alan S. Blinder. ''To Bush's credit, his plan is designed to mitigate, rather than exacerbate, that problem.''

Indeed, Bush is trying to spin his package as a kind of conservative anti-poverty measure--a tax tide that lifts all boats and yachts. ''My tax cut is not about productivity, it is about people,'' he told the Des Moines Chamber of Commerce. ''Economics is more than narrow interests or organized envy. A tax plan must apply market principles to the public interest.''

Bush's proposal, crafted by a team of advisers led by American Enterprise Institute's Lawrence B. Lindsey, may be a pastiche. But wimpy it's not. Over 10 years, it could cost far more than tax bills nixed by Congressional Republicans--$1.3 trillion vs. $792 billion.

To pay for it, Bush makes two iffy assumptions. The first: that Congress, which spent $32 billion of the Social Security ''lockbox'' this year, will stop there. The second: The New Economy will keep outpacing official growth and tax revenue projections. He assumes a growth rate averaging 2.7%, rather than the 2.4% forecast of the Congressional Budget Office. ''Everyone has revised up the forecast,'' Lindsey shrugs. ''We're confident CBO will as well.''

So how does business like Bushonomics? Just fine, thank you--even though, as American Business Conference President Barry K. Rogstad notes, ''there's no business stuff in the plan.'' Bush makes no apologies: ''This is a plan that doesn't address business, this is a plan that addresses individuals.'' Still, many corporate chieftains are beaming. They stand to gain handsomely from Bush's proposed 33% top bracket. Other execs note that, with the expansion nearing its ninth birthday, a boost to consumer spending is just the ticket. Says Bush Communications Director Karen Hughes: For Bush, ''a tax cut is necessary to continuing prosperity.''

Chiefly, the Governor is riled about high marginal rates, which his oil-patch entrepreneurial streak tells him are keeping a lid on growth. And he frets that tax ''distortions'' keep low-income Americans from joining the middle class. The latter concern led Bush to design some progressivity into his program. For instance, he cuts the existing 15% bottom bracket to 10%, a one-third reduction. By contrast, top-tier taxpayers see their rates fall to 33%, from a maximum of 39.6%--a cut of 16%. Bush would also greatly expand education and child tax credits and provide marriage-penalty relief (table).

But this dollop of compassion, Democrats charge, is outweighed by hefty benefits for the rich under Bushonomics. For instance, an analysis by the Center on Budget & Policy Priorities, a liberal-leaning research group, says two-thirds of the plan's benefits go to the top 10% of taxpayers, while only 1% goes to the bottom 20%. Bushonomics is ''not very compassionate towards people trying to work their way into the middle-class,'' says Iris J. Lav, a Center tax specialist.

NOT RISKY? Another potshot from Democrats: Bushonomics is a leap back toward Reagan-era deficits. Veering away from fiscal discipline would be ''insane,'' says Lazard Freres Managing Director Steven Rattner, a Gore adviser. Voters, he says, ''won't be sucked in by promises of tax cuts that we cannot afford.''

Bush doesn't buy the criticism. ''I do not accept the assumption that it is somehow 'risky' to let taxpayers keep more of their own money,'' he says. But at the moment, voters are not sure they need a big tax cut. They're telling pollsters that they are more interested in expanding health and retirement programs. Unlike Reagan--the 1986 version--and like his father, ''W'' shows no interest in broad-based tax reform. Bush's own 1997 state tax overhaul was shredded by Texas legislators. Now, as a national politician who's promising to revamp education, rebuild the military, shore up Boomer retirement, and push for the biggest tax cuts since 1981, Bush feels he lacks resources for a political scrap over tax simplification.

As a result, the plan he rolled out on Dec. 1 is less a display of coherent tax philosophy than a political instrument. Says Joel Slemrod, a University of Michigan tax economist: ''It's designed to hit all the political hot buttons.''

Whether the program meets Bush's own lofty economic objectives remains an open question. Will it promote growth? Yes, but not as much as Bush hopes. When the plan is fully effective, it would supply nearly $200 billion of stimulus a year. That should hype short-term consumption. But the impact could be undermined if the Fed raises rates in response to an overheating economy.

Similarly, will Bushonomics promote its second major objective of advancing social mobility? By asserting their plan will drop 6 million Americans from the tax rolls and by providing more tax relief for families, the Bushies vow it will. But skeptics counter that poor and near-poor families with children would get very little benefit under Bush's blueprint. Many of these folks already are exempt from income taxes, so an additional rate cut does them little good.

While social scientists debate the program's long-term impact, one thing is clear: In political terms, Bush has given his drive for the nomination new propulsion. Particularly in taxophobic New Hampshire, where Bush currently trails Arizona Senator John McCain, a mega-tax cut could reignite Bush's campaign. The governor's main concern is finding a way to fuse old-time Reagan principles with Bushian social moderation. And judging by the big smiles in the Bush camp, he thinks he's done it.

By Lee Walczak, Rich Miller and Howard Gleckman in Washington, with Richard S. Dunham in Des Moines

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