FORGET THE NEOCONS, IT'S THE NEOCONOMISTS YOU SHOULD BE WATCHING:

TAX CODE: Tax cuts were just the beginning: the President is signalling a far more radical agenda. (JOHN CASSIDY, 2004-08-30, The New Yorker)

A few weeks ago, George W. Bush crossed the Potomac to a community college in Annandale, Virginia, where he hosted an “Ask President Bush” town-hall-style meeting and took up a favorite campaign theme, saying that one of the things that separated him from his opponent was his intention to create a “culture of ownership.” The same day, the Bush-Cheney campaign released a new television ad that shows pictures of houses, workers, and businesses as the President announces, “One of the most important parts of a reform agenda is to encourage people to own something. Own their own home, own their own business, own their own health-care plan, or own a piece of their retirement. Because I understand if you own something, you have a vital stake in the future of America.”

The President’s ownership initiative hasn’t featured prominently in the media coverage of the campaign, which, strictly from a news perspective, is understandable: he hasn’t announced many specific proposals to back up his talk. But in downplaying the Bush Administration’s economic agenda the media is missing one of the biggest domestic stories of the 2004 campaign. When the President pledges to create an “era of ownership,” he is not talking merely about encouraging people to buy their own homes and start small businesses. To conservative Republicans who understand his coded language, he is also talking about extending and expanding the tax cuts he introduced in his first term; he is talking about allowing wealthy Americans to shelter much of their income from the I.R.S.; about using the tax code to curtail the government’s role in health care and retirement saving; and, ultimately, about a vision that has entranced but eluded conservatives for decades: the abolition of the graduated income tax and its replacement with a levy that is simpler, flatter, and more favorable to rich people.

Work on achieving this ambitious program began with the tax cuts that Congress passed in 2001, 2002, and 2003, but the conservative economists who advise Bush and the right-wing institutes that support him have more in mind than consolidating their gains. Despite a gaping budget deficit, they are pressing the President to continue down a route that will reverse almost a century of American history. Since the personal income tax was introduced, in 1913, it has been based on two principles: the burden of taxation is distributed according to the ability to pay; and capital and labor carry their fair share. The Bush Administration appears set on undermining both of these principles. [...]

Taken together, Bush’s tax cuts were even bigger than the ones Ronald Reagan introduced in his first term. In 1981, Reagan slashed income-tax rates by about a quarter, claiming that the government’s revenues would actually rise as the tax cuts unleashed the economy’s potential. This claim, which Arthur Laffer, one of the originators of supply-side economics, formalized in his famous “Laffer curve,” turned out to be wildly optimistic, and the budget deficit soared. In the ensuing years, a panicked Congress reversed some of Reagan’s tax cuts, and the White House quietly accepted the rollbacks, which increased tax revenues. When the International Monetary Fund recently compared Bush’s fiscal record with Reagan’s, it concluded that “the revenue effect of the Reagan tax cuts was considerably smaller than in the current period.” [...]

Bush’s tax cuts weren’t just bigger than Reagan’s: they were more strategic. During the nineteen-nineties, conservative Republicans on Capitol Hill broke with the deficit hawks in their party and rallied behind former Congressman Dick Armey’s 1994 proposal for a flat tax (which was similar to the one Steve Forbes campaigned for in 1996 and 2000). Partly because the economy was gaining strength after Bill Clinton’s 1993 tax increases, which helped balance the budget, and partly because studies showed that a flat tax would benefit the wealthy, who would see their tax rates slashed, the Republican tax cutters failed to make much progress. After George W. Bush was elected, they changed tactics. Instead of following the Reagan model and pushing for a single revolutionary reform, they promoted a series of smaller changes that would ultimately lead in the same direction. “That’s the hidden story of what is going on under Bush,” Stephen Moore said. “People like me have been advocating a flat tax for a decade. I helped Dick Armey put together his flat-tax proposal. Nobody could get it done politically. What Bush has done, in a hidden way, is move us in baby steps toward the flat tax.”

The 2001 tax reform reduced the top rate of income tax from 39.6 per cent to 38.6 per cent, the second rate from 36 per cent to 35 per cent, the third rate from 31 per cent to 30 per cent, and the fourth rate from 28 per cent to 27 per cent, with more cuts scheduled for later years. It also introduced a new lower rate of ten per cent on the first six thousand dollars of taxable income, increased the child tax credit, reduced the tax penalty paid by married couples who file jointly, and phased out the estate tax.

Conservatives supported this reform package, but from their perspective it had a big shortcoming: the only part of it that dealt with taxes on savings was the phasing out of the estate tax, and even that wasn’t scheduled to be completed until 2010. Flat-tax enthusiasts argue that saving and investment is the key to economic growth, and they propose that most of the income generated from savings—interest payments from bank accounts and bonds, dividend payouts from stocks, and capital gains from the sale of any asset—should be tax exempt.

In 2002, Ernest Christian, a Republican tax lawyer, circulated a plan to create a flat tax in what he termed “five easy pieces.” Other conservatives developed Christian’s plan. Grover Norquist, the president of the lobbying group Americans for Tax Reform, set up congressional caucuses to support five specific changes: eliminating the estate tax; ending the taxation of capital gains; making all income generated from savings tax free; letting businesses write off their investments in a single year rather than depreciating them over a long period; and abolishing the Alternative Minimum Tax, which originated in a 1969 congressional act to counter tax avoidance by the rich, who sometimes had so many deductions that they ended up paying no tax. “People don’t trust you to do twenty-seven things at once and have it come out right,” Norquist, who has close ties to Karl Rove, Bush’s political strategist, told me. “Why would you ask people to approve twenty major changes to the tax code at once, which irritate as many people as they please, as opposed to a series of five or six distinct tax cuts, each of which can be explained and sold to a constituency?”

The tax reforms of 2002 and 2003 contained significant elements of the Christian-Norquist program. The 2002 law allowed businesses to write off half of their investments immediately, through 2004, a provision that saved firms billions of dollars. The 2003 law sharply reduced taxes on dividends and capital gains, setting their maximum rates at fifteen per cent. William Beach, an economist at the conservative Heritage Foundation, later described the 2003 tax bill as “one of the greatest supply-side changes to tax law in U.S. history.”

Also in 2003, the Administration proposed two new savings vehicles—Retirement Savings Accounts and Lifetime Savings Accounts—which would have replaced I.R.A.s and allowed many wealthy Americans to save virtually tax free. The accounts were designed to work in the same way as some existing I.R.A.s but with much higher contribution limits—seventy-five hundred dollars a year for each person—and fewer restrictions on withdrawals. If this proposal had become law, a well-to-do family of four would have been able to shelter more than a million dollars over thirty years. Middle-class families, on the other hand, would have seen little benefit, because they spend most, if not all, of their income. More than ninety per cent of American families fail to put away the maximum sum allowed under existing retirement accounts, which is three thousand dollars a year for I.R.A.s and thirteen thousand dollars a year for 401(k) plans. After the savings initiative received a lukewarm reception in Congress, the White House dropped it, only to resurrect it, in a slightly modified form, earlier this year.

The Bush Administration portrayed most of these reforms as efforts to boost a lagging economy, rather than as part of a plan to reshape the tax system in a radical way, but conservative activists knew they were making progress. “A little bit like Reagan, people get the vibes,” Norquist said. “They understand what we are trying to accomplish. Do you think it was an accident that the first three tax cuts moved toward expensing business expenditures, toward universal I.R.A.s, toward getting rid of the capital-gains tax, toward getting rid of the double taxation of dividend income, toward getting rid of the death tax? No. It is consistent with a vision.” [...]

At this week’s Republican National Convention, he is also likely to expand upon the theme of ownership. He may well talk about establishing investment accounts within Social Security, as well as Retirement Savings Accounts and Lifetime Savings Accounts outside of Social Security, and health savings accounts, which his economic advisers view as a step toward individual, portable health-care coverage. Republican strategists believe that by emphasizing individual saving and investment the President is acting astutely. “The biggest demographic shift in the past thirty years is not the number of people who speak Spanish; it is the number of Americans who own stocks,” Norquist told me. “It was twenty per cent of adults when Reagan was elected. Now it is sixty per cent, and seventy per cent of voters.”

But while the President makes bland speeches about ownership, economists close to the Administration are pushing for a top-to-bottom revision of the tax code, featuring a major overhaul of corporate income tax and further cuts in personal income tax rates. If Bush is reëlected, the anticipated reform of the Alternative Minimum Tax, which Republicans in Congress loathe, may well serve as the pretext for this agenda. The A.M.T. sets a lower limit on the amount of federal tax that people have to pay, regardless of how many deductions they have. It already hits about two and a half million taxpayers, and more people are qualifying for it every year. “The A.M.T. offers a chance to discuss fundamental tax reform,” Glenn Hubbard told me. “We would want a system that could replace the A.M.T. and the individual income tax with a new individual tax system.”

Although Hubbard returned to his professorship at Columbia last year, he still acts as an informal adviser to the Bush campaign. He is one of several Harvard-trained economists who have worked in the Bush Administration. Hubbard and Larry Lindsey, who headed the National Economic Council from 2001 to 2002, both did graduate work under Martin Feldstein, an adviser to Bush in 2000, who has long argued that taxes, particularly taxes on savings, reduce economic growth. Greg Mankiw, Hubbard’s successor as chairman of the Council of Economic Advisers, is a colleague of Feldstein’s in the economics department at Harvard and shares many of his views. “There are a lot of us who believe that putting less of the tax on savings would be a good thing for the economy in the long run,” Feldstein told me.

Rather than coming right out for a flat tax, the Harvard economists tend to use the less politically charged term “consumption tax.” Flat taxes and consumption taxes are closely related: both exempt saving and tax spending. Theoretically, it is possible to set up a progressive consumption tax, but most conservative economists favor a single rate set as low as possible; i.e. a flat tax.

Democrats have made so little noise about the President's revolutionary economic program that you're left wondering whether they just don't understand it, don't want to give him credit for how much of it he's effected already, or can't believe the moron has such big ideas.

Posted by Orrin Judd at September 12, 2004 11:01 PM