Bush, in effect, is proposing nothing less than a radical reshaping of the tax system. Combine his proposal to end taxes on stock dividends with his idea of creating three new, tax-free savings and retirement plans that allow families to sock away substantial income annually and you get a huge tax incentive for Americans to save and invest more--and consume less. It is a bold experiment. If it works, it would invigorate the economy. But people may simply shift their existing savings from taxable to nontaxable accounts. Fewer employers may offer retirement plans. And the public may view it as a sop to the rich.
Managing all these initiatives, moreover, is problematic. Even as he tries to change savings and retirement, Bush is planning to shift more responsibility for Medicaid to the states, push vouchers for education, and nudge domestic and worldwide opinion toward the need for a radically new post-September 11 U.S. foreign policy of preemption to replace the old Cold War policy of containment. Iraq is the just the first instance of this. North Korea may be the second. But Bush has stumbled in making his case, and the cost has been significant. Anti-Americanism is rife around the world. So, too, has the Administration fumbled the ball on selling the dividend tax cut to the public.
But Bush's greatest risk is the skyrocketing federal budget deficit. He's betting that higher growth will pay down the growing debt and keep interest rates low. It's a real gamble. By their own numbers, the initiatives the President is proposing will produce $1 trillion in combined deficits through 2008. The budget doesn't include Iraqi war costs or the price of the occupation, which could total hundreds of billions of dollars.
If Bush's savings and tax initiatives invigorate investment, if productivity growth stays in the 2% to 2 1/2% range, if the war goes well, if there is no terrorism at home, if the economy grows at 3% to 3 1/2% per year for the whole decade--if all that happens, Bush could win his growth bet. But that's a lot of "ifs." We certainly favor policies that stimulate saving, investment, and growth. But the magnitude of the President's bet is so large in so many ways that it may drain away revenues needed just when the boomers retire and security costs are soaring. The danger is that the risks outweigh the benefits. What is needed is a smaller, more focused package.