The Brains Behind Bush's Tax Plan
A talk with American Enterprise Institute's Lawrence Lindsey

Over the last nine months, former Federal Reserve policymaker Lawrence Lindsey has headed up a team of elite economists trying to put together a tax-cut plan for Republican Presidential front-runner George W. Bush. On Dec. 1, the Texas Governor unveiled the fruits of that effort in a speech in Des Moines: A surprisingly bold $1.3 trillion, 10-year tax cut that was attacked from the right as being too stingy and from the left as being too rich. In between shuttling from Washington to Des Moines to Manchester, N.H., for Bush's first campaign debate, Lindsey took time out to discuss the tax-cut plan with Business Week economic correspondent Rich Miller.

Q: Why does Bush want to cut taxes?
The reason the American economy is second to none is because we encourage entrepreneurship and we promote social mobility. That's what this tax cut is all about. We made changes that encourage entrepreneurship, promote families, and promote social mobility. It's a complicated program. It's not a bumper sticker. But the problems of the tax code aren't bumper sticker problems.

Q: How does the plan accomplish its goals?
Cutting the top tax rate encourages entrepreneurship. To increase social mobility, we establish a 10% tax bracket at the bottom and double the child credit. That raises the threshold at which people pay taxes to $36,000 for a married couple with two kids and $31,000 for a single mom with two kids. It's very hard to say you have social mobility when you have a single mom making $22,000 paying a 36% marginal federal tax rate [due to the phase-out of the earned income tax credit]. We solve that marginal rate problem basically by eliminating the income tax [for those people].

Q: Isn't this plan tilted toward helping the rich?
Under the plan, the income tax system becomes more progressive. We're taking 6 million families off the tax rolls. The size of the tax reduction decreases with income. It's 100% at the bottom, then it goes to 30, then 20, then 15. At the very top, the tax reduction is 9.7%. The share of taxes paid by people making over $100,000 rises from 61.9% to 64.1%.

Q: Why didn't Bush propose a capital-gains tax cut?
If you make a list of egregious problems in the tax code, a single mom paying a 36% marginal tax rate is a worse problem than a 20% capital-gains rate.

Q: Won't this plan bust the budget?
We are not dipping into the Social Security surplus at all. We were very, very cautious in our budget.

We made two adjustments to the last set of CBO [Congressional Budget Office] numbers. The first was to take account of the increased spending that the Congress and President agreed to [in this year's budget]. That actually reduced the amount of money available for tax cuts. The second thing we did was to update the CBO's [2.4%] economic growth forecast. We're assuming 2.7% annual growth. The consensus of Blue Chip economic forecasters is now 2.8%. Everyone has revised up their forecasts. We're very confident the CBO will as well. Otherwise we stick to CBO's budget assumptions religiously.

Q: With the economy already running flat out, won't a tax cut just prompt the Federal Reserve to raise interest rates?
I doubt [Fed Chairman Alan] Greenspan will have any problems with this plan. It doesn't cost anything until 2002. Why would that cause a problem for monetary policy now?

Q: Does this plan represent a third way between supply-side tax cutters and fiscal conservatives?
We wish we could have done more. But we believed that to be credible, we had to have a responsible budget.

Within that budget box we picked those taxes that are the biggest impediments to economic progress. In that sense it's a third way. We're in the middle.

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