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12/28/2002 Archived Entry: "bang for buck"

BUSH NEEDS TO GET THE MOST ECONOMIC BANG FOR THE TAX-CUT BUCK: This Washington Post story makes me wonder if some in President Bush's inner circle are missing the point on tax cuts. According to this report, unnamed political advisers are suggesting that the administration drop plans to accelerate the reduction in the top marginal income tax rate to focus on other tax cuts, such as lower taxes on dividends.

Now, I am all for cutting taxes on dividend income, but I think failing to cut the top income tax rate faster would be a mistake. Yes, it is more difficult to defend something that liberals can easily refer to as a tax cut for the wealthy. But instead of focusing on the short-term political ramifications of any specific tax-cut package, the Bush administration needs to concentrate on the long-term policy goals of stimulating economic growth and creating new jobs. Whatever mileage the Democrats will get out of ads attacking Bush for cutting millionares' tax bills will be more than compensated for if the economy and employment are growing briskly. On the other hand, a more restrained tax-cut package that doesn't lend itself as easily to Democratic cariacture but doesn't significantly enhance incentives or stimulate growth will be a political loser in the long run. The two issues that will ultimately make or break President Bush's reelection bid in 2004 are the multifaceted war on terror and the economy. If either are perceived as being in the toilet, Bush's high approval ratings today will not save his reelection from an astute Democratic campaign tomorrow.

I have repeatedly argued in the pages of ESR that the Bush tax cut was too small, takes too long to phase in and is effectively limited by its expiration date. Although it is politically the least popular aspect of his tax cut, the reduction in the top marginal rate is what will have the greatest economic benefit. The biggest incentive enhancement, and thus the most stimulative effect (to say nothing of "Laffer Curve effect"), takes place at the highest rate. Conversely, the most popular part of the tax cut, the rebates, offers the least economic benefit. Again, I do favor cutting taxes on dividends both from the perspective of political philosophy and economics (I think it's a pro-growth measure), but Bush is going to get the most bang for his buck with such "tax cuts for the wealthy" as a lower top marginal rate and a cut in the capital gains tax. These are tax cuts that will increase incentives to earn additional income, create wealth and expand employment opportunities.

Practically any meaningful income tax cut a Republican could offer is going to be pilloried as a giveway to the rich by Democrats and the left. Why not just deal with the inevitable criticism and work for the most pro-growth tax cut that is politically possible? Aside from making compromises necessary to make sure that whatever tax package the White House introduces can actually pass Congress, efforts to water down tax cuts should be avoided. The key political consideration is not what Democrats will say about a tax cut, but whether jobs and growth are in evidence in 2004. Maximizing both is also the right thing for the country.