How to Prevail on Taxes

WASHINGTON – President Bush can be excused for failing to propose instant tax relief to boost the sagging economy and cratering stock market.

When he met with congressional Republicans at the White House last week, Bush had an explanation. While he's anxious about the livelihood of all 270 million Americans, he's chiefly "worried about three Americans," namely two Republicans and one Democrat whose votes he needs to win Senate approval of his budget. He doesn't want to tinker with his $1.6 billion tax cut plan just yet for fear of raising its overall cost and spooking the waverers. That could cause the defeat of the budget and jeopardize the tax cut.

So as a tactical matter, he's holding back. Fine.

Perhaps the president should be forgiven as well for letting Democrats seize center stage on the tax issue, at least temporarily.

They've leapfrogged him by noisily advocating a stimulus to jack up the economy now. They've done this by exploiting the flaw in Bush's tax pitch: He's touted his 10-year tax plan as a remedy for the current downturn but hasn't proposed enough in up-front tax relief to have much impact.

Democrats want to trump Bush by giving every American who pays federal income or payroll taxes a $300 rebate (at a cost of $60 billion) as soon as possible. They'd also like to trim the lowest income tax rate from 15 percent to 10 percent immediately.

Democratic senator Joe Lieberman goes further, calling for a cut in the capital gains tax rate from 20 percent to 15 percent. But few Democrats have joined him.

The problem for Bush is Democrats may prevail on their stimulus package. That is not fine.

The Democratic tax offensive threatens the overriding goal of Bush's tax policy, which is to insure prosperity and reduce the size of government relative to the economy.

How could this be jeopardized? Democrats want their stimulus to be the only tax relief passed this year. And if it wins, it may be.

That would mean no across-the-board cuts in personal income tax rates now and no assurance of them in the future. It would leave the bulk of the surplus in Washington for Congress to spend. Bush acknowledged the threat last week in his speech at Western Michigan University. And he wisely insisted that his full tax cut be approved along with any stimulus. He can accomplish this by following the Ronald Reagan model.

In 1981, Reagan said the country faced an "economic Dunkirk" if tax rates weren't slashed. His tax cut would produce enduring economic well-being and, by the way, he added, it would also lift the country out of the recession.

Reagan was ready to marry the pragmatic to the ideological, the political to the economic. He did what it took to prevent Democrats from outbidding his tax cuts, even if that meant swiping some of their proposals.

Bush needs to do the same to bolster the near-term stimulus his tax cut offers and make it more politically attractive. So far, he's agreed only to make it retroactive to January 1, 2001. That's insufficient if Bush is to thwart Democrats. And the money is available -- $93 billion in the non-Social Security surplus this year.

What should the president do?

There's plenty to choose from. Starting to phase in the rate cuts in 2001, not 2002 as originally planned, would cost only $17 billion (though it would make the overall tax plan a bit costlier). This first phase would reduce each rate by 1 percentage point except the top rate, which would drop from 39.6 percent to 38 percent. Bush could also adopt the scheme passed by the House, which lowers the bottom rate from 15 percent to 12 percent. That would cost several billion more.

Then, there's the child tax credit. The House voted to double the credit, and to begin phasing in the increase with a $100 credit on 2001 taxes. That, too, would add some billions. A capital gains tax cut, however, would cost nothing if enacted for two or three years, even in the normal scoring, which treats tax cuts as lost revenue.

There would still be room for the boldest step Bush could take: a Republican tax rebate. As luck would have it, House majority leader Dick Armey has already gotten the Joint Tax Committee to cost out potential rebates. A $600 rebate for all income taxpayers would cost $70 billion. Of course, adjustments downward in the rebate could be made so the $93 billion ceiling isn't exceeded. But the point is there's every reason Bush should grab the Democrats' idea of a rebate, add to it, and use it to win votes for his entire tax plan.

One can almost hear the White House's complaints: We don't need to take extreme measures since Democrats are gradually moving our way. Congressional Republicans may panic, but the president shouldn't. A rebate wouldn't have supply-side effects. And so on.

But what Bush needs is for taxpayers, as they fill out their tax forms a year from now, to see they've already gotten a meaningful tax cut and to know more is on the way. If this happens, Bush will have succeeded as president, both economically and politically. Just like Reagan.