When George W. Bush wanted to run a sniff test for his audacious tax-cut program, which includes eliminating the levy on corporate dividends, he dispatched his new economics chief, Stephen Friedman, to New York City to wave it under the noses of such bankers as UBS America chairman Donald Marron and brokerage legend Muriel Siebert. Friedman is a polished pinstriper, a former Goldman Sachs chairman with the kind of Street cred the Administration lacked before purging its economic team last month. In four meetings, Friedman did as much listening as talking, knowing enough not to insult his former brethren with a lecture. And the financiers loved the message. Of course, it could have been delivered by a pizza-delivery man and still received a rapturous response. Wall Street smelled the money. A lot of it.
The President's program, if passed unchanged, would cost the Treasury $364 billion over the next 10 years in lost taxes on dividends alone. Tax-rate cuts scheduled for next year and 2006 would start immediately, as would a $400 increase in the tax credit per child. The proposal would also speed relief from the marriage penalty and alternative minimum tax and lift expense allowances for small businesses. Including a few other measures, the total package would remove $674 billion from federal coffers; after interest on the debt, the tab over a decade could be more than $900 billion.
These proposed tax cuts are more than twice what Bush's allies had expected and certify the baseball-loving President as a man who swings for the fences. In slashing taxes on dividends rather than, say, the payroll tax, Bush is playing to the supply-side crowd and investor class for whom the stock market is critical. In making the wealthy the biggest beneficiaries of the cuts, Bush is willing to face down accusations of class warfare. In its willingness to risk cranking up the deficit to record levels, the Bush team is repudiating a decade-long Republican fixation on balanced budgets as well as the Clinton Administration's bedrock belief that big deficits lead to higher interest rates and hurt long-term growth. And in focusing on economic expansion in 2004 rather than short-term stimulus now, Bush may imperil an already jobless recovery.
Yet if the stock market is levitating and unemployment is falling around election time, 21 months from now, when most of the benefits will start to kick in, Republicans believe that key voting groups like married couples and seniors will not really care if the rich got richer as long as they did too. "Our first challenge is to allow Americans to keep more of their money so they can spend and save and invest," Bush said in announcing the program in Chicago last Tuesday.
Democrats, several of whom have unveiled their own more modest proposals, say Bush's economics embrace a central stereotype of the Republican Party: only the rich need apply. Although Bush touted the fact that the average tax bill would shrink $1,083, almost half of all filers would get reductions of less than $100, according to the left-leaning Center on Budget and Policy Priorities. The top 1% would get breaks of $24,400, on average. "This is the most reckless policy I have seen pursued by any President in my adult life," fumes Kent Conrad of North Dakota, the ranking Democrat on the Senate Budget Committee.