TCS Daily

Betting Against Bush

By Bob Collins - June 2, 2003 12:00 AM

How big a victory did President Bush score on taxes? Consider this: Congress passed permanent, retroactive marginal rate reductions for the wealthiest taxpayers, and the press barely noticed. The reason: Bush had already advanced to his next bold tax target - double taxation of dividends - and his advance on this new front got all the attention.

Bush's impressive victory demonstrates the patience and persistence that are defining qualities of his Presidency - and the reasons this won't be the end of tax reduction and reform under George W. Bush. So if you're a taxpayer or a CFO wondering whether these tax cuts will last, my advice is: Bet on it.

From the time the first Bush tax cut was passed in 2001, the phase-in of marginal rate reductions was the fly in the ointment. The economy was denied the boost of marginal rate reductions, while growing deficits were blamed on tax cuts that hadn't yet kicked in. Democrats were focused on the opportunity to repeal the marginal reductions before they could take effect, thus hoping to avoid the charge that they had raised taxes.

The newly enacted tax bill settled the issue of lower marginal tax rates. Yet, with all the focus on dividends, the marginal rate reductions - retroactive to the beginning of 2003 - were buried deep in most press accounts of Congressional passage. (By now the focus has shifted to refund checks in the mail.)

In the same week the tax cuts passed Congress, two other events demonstrated the powerful persistence of the Bush administration. A 14-0 vote in the Security Council ended sanctions in Iraq and gave UN backing to U.S. and British administration of Iraqi reconstruction. Only weeks ago, many conservatives were warning Bush against exposing himself to another stiffing by the UN, and opponents were looking forward to one.

That same week, the Bush administration issued a new directive on missile defense calling for a more global approach. The new policy reflects and encourages the growing support around the world for missile defense. A year ago, broad international acceptance would have been inconceivable. But Bush continued to push on ahead, and today it's not even news. (Just as supply-side cuts in marginal tax rates aren't news any more.)

The tax reform victory also highlighted three other key strengths that President Bush will bring to future tax battles:

Flexibility and resilience: Bush's winning strategy on taxes mirrors the military strategy in Iraq. Bush used the power at his disposal - strong public support in the wake of the Iraq campaign - to drive quickly to his goal, while maintaining his maneuverability to respond to a range of potential challenges.

Most importantly, President Bush and his Congressional allies worked around the seemingly insurmountable barrier of a $350 billion cap on the tax cut. In the end, Bush accepted some provisions he didn't like, most notably $20 billion for the states, but was able to head off other negative features, such as offsetting tax increases proposed in the Senate.

Bush has shown that he can use these trade-offs to his advantage. The phase-in in the first tax cut created problems, as noted above, but it also set the stage for the recent victory. By accepting a 15 percent tax on dividends, Bush compromised on his moral argument for full repeal. But he can always make that argument again, and next time it won't be as big a leap.

In addition, as Dick Morris has pointed out, the phase-out of key provisions in the bill, adopted to meet the cap, creates a strong political advantage for Bush's party in the 2004 elections. Democrats will be forced to support extending these breaks or face voters' wrath for wanting to raise taxes.

More broadly, President Bush has pursued bipartisanship when possible or practical, but he has demonstrated that he's also willing to play hardball when necessary. He went straight to the people in the states of wavering Senators, and he put together just enough votes to allow Vice President Cheney to break a tie.

Focus on results, not credit: President Bush didn't seem to care that the press characterized the final bill as a setback, because the total "cost" of $350 billion was less than half of the $726 billion he proposed. But the difference is virtually all a result of phase-outs of key provisions. The Wall Street Journal cited an estimate by the Center on Budget and Policy Priorities that the full 10-year "cost" of the tax provisions, if made permanent, would be $810 million - more than Bush's initial proposal. And Bush can be expected to be as aggressive in reversing phase-outs as he was in accelerating phase-ins.

All of Bush's statements, before and after final passage of the bill, were focused on Congress and the Congressional leadership, always sharing credit. Indeed, a number of Republicans in Congress - and others such as the Club for Growth - played key roles in producing a great supply-side tax victory.

Bush's focus on results also shaped his strategy in Congress. He appeared to be open to the House approach to reduce taxes on both dividends and capital gains, which is arguably better policy than favoring dividend-paying companies over growth companies. But he gave no support to proposals in the Senate to exempt up to $1000 of dividend income, which would do nothing to reform tax incentives. If all he wanted was a tax reduction number to claim victory, one approach would have been as good as another. Clearly, what he wants is growth-oriented tax policy.

Willingness to take risk: After passage, the press and several Democrats noted that Bush had taken a big risk. Rather than positioning himself to shift or share blame if the economy remains weak, Bush staked his political future on a strategy to strengthen it. In an article titled "Tax Cut Is a Victory and a Risk for Bush," Los Angeles Times political analyst Ronald Brownstein quoted an aide to Rep. Dick Gephardt: "[Bush] completely owns the economy now. There's nothing he's tried to do in a significant way economically that Congress hasn't approved. To the extent people now focus on the economy, it's his economy."

Fair enough. In light of the economy's persistent sluggishness, it looks like Bush is taking a big risk. But the warnings are strikingly similar to those issued during the 2002 campaign, when the same people said that Bush's aggressive campaigning jeopardized his stature if Republicans failed to re-take the Senate. We know how that turned out - which is why we're now talking about this tax cut.

Indeed, at this point it would be risky to bet against Bush. He has shown the patience and resourcefulness to accomplish things that seemed impossible. Because his achievements are not dramatic - by the time he's done, the inconceivable has become a fait accompli - he continues to be "misunderestimated."

President Bush's track record strongly suggests that further progress on tax reform lies ahead. It's less clear whether we'll also see progress on other key economic goals - reductions in government spending, reform of Social Security, free trade, and deregulation. But Bush has proven once again that he means what he says, and sooner or later he does what he says he's going to do.

Bob Collins is a writer living in Ohio.

TCS Daily Archives