John McCain

Check's in the Mail

How the tax cut went from impossible to inevitable

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How the tax cut went from impossible to inevitable

Shortly after this double-issue lands in your mailbox, so too will a check from the federal government, ranging from $300 for singles to $600 for married folks. It's not a gift from the feds—it's your money, the result of a new 10 percent tax bracket. It's an income tax cut, effective this year.

This wasn't supposed to happen. Just as people "know" Bush is a policy lightweight, they also knew that tax cuts were damn poor politics. According to the conventional wisdom, a tax cut proposal was perhaps necessary in the Republican primaries, to fend off the likes of Steve Forbes. But it was supposed to be a non-starter with the broader public, which would rather have the money invested in schools or light rail. After John McCain opened a can of whoop-ass on the tax-cut-touting Bush during the New Hampshire campaign, beating the Texan 49 percent to 31 percent, press sages declared that even Republicans had no interest in tax cuts. The question many were asking was how Bush—who was known for locking his little mind on one or two issues and pursuing them doggedly—could de-emphasize tax cuts without appearing feckless.

"The broad message coming out of Tuesday's New Hampshire primary is that the primacy of tax cuts in Republican politics has been demolished," declared political analyst Charlie Cook in February 2000. Writing in the influential weekly The National Journal, Cook opined that the Republicans were finished, since as tax cuts go, so goes the GOP: "The only issue that really separated Democrats from Republicans has been taxes. Now, not even Republican primary voters in notoriously tax-averse New Hampshire respond to the siren song of tax cuts the way they used to."

Maybe not, but candidate Bush turned his siren song into a rousing tune, telling voters that it's taxpayers' money, not the government's; that tax cuts are an insurance policy against a slowing economy; and that they provide a greater incentive to work. Listen to the Not-So-Great Communicator himself: "It is not just the amount of taxes that matters, it's also what the economists call a taxpayer's marginal rate: the taxes we pay on every extra dollar we earn," said Bush, outlining his proposal in December 1999. "That rate determines the incentives to work."

"In my judgment, what's risky is to leave a lot of unspent money in Washington because guess what's going to happen," he argued in the January 10 Republican primary debate. "It's going to be spent on a bigger federal government." At a Florida high school in March, he reiterated, "Giving people their money back serves as an insurance policy against economic downturn."

A funny thing happened: Even as the pundits chided Bush for sticking to a message that they said no one wanted to hear, and even as Al Gore attacked it as a "risky tax scheme" and "economic snake oil," it was Gore at first, and later Democrats in Congress, who had to make adjustments. Polls may show that the public is luke-warm on tax cuts. But that may be because promises of tax cuts since Reagan have far exceeded their reality.

Bush crafted a tax cut that benefited most of the Republican target market. He offered across-the-board rate cuts for everyone, including the rich, doubled child-tax credits for the pro-family folks, and increased the caps on education savings accounts. He fired back at charges that the rate cut unfairly benefited the rich by saying that everyone who pays income taxes will enjoy a cut under his plan. He marketed the benefits to the great American middle class with carefully selected tax families, who he claimed would get to keep $1,600 more of their hard-earned money every year.

When Cook declared tax cuts dead, Gore was offering $250 billion over 10 years in "targeted" tax cuts. By June 2000, Gore had doubled his offer to $500 billion. By winter, congressional Democrats were offering a $900 billion tax cut plan, though without rate cuts for high earners. Bush stood firm at $1.6 trillion, a sign, Washington insiders noted, that he was unwilling to move to the middle to govern. This May, Bush indicated he would accept a $1.3 trillion cut. And on May 26, 108 days after he sent his tax cut proposal down Pennsylvania Avenue, Congress passed a 10-year, $1.35 trillion cut. Twenty-seven Democrats joined every Republican in the House and 12 Democrats joined 46 Republicans to support the bill in the Senate.

"Bush staked his presidency on it," says Grover Norquist, president of Americans for Tax Reform, who lobbied hard for the tax cut. "The Bush presidency would have been over if he didn't get it, so everyone who wished him well had to support him." Norquist notes that Bush also assured supporters that this tax cut was the beginning, not the end, of his tax reform efforts. The result: The widely predicted feeding frenzy of business and other interest groups seeking to include their special provisions in the tax bill didn't happen. Says Norquist, "We spent very little time fighting ourselves and all of our energy passing the cuts."

Norquist and others also developed a new strategy to ensure the final tax cut was bipartisan. Knowing that tax cuts are always more popular outside the Beltway echo chamber, they lobbied state legislative bodies to pass resolutions calling for tax cuts. Twenty-seven out of 99 did, including many Democratic-controlled bodies. Legislators were then brought to Washington to lobby key senators, including Montana Democrat Max Baucus, who turned out to be pivotal. "That was a totally new strategy and the other side didn't see it coming," says Norquist.

The tax cut package is far from perfect. To stay within revenue caps, provisions phase in and out haphazardly. The 10 percent bracket is effective immediately for the first $6,000 income for singles and the first $12,000 for married couples. Each of the other marginal rates drop 1 percent on July 1, 2001, and then gradually phase down to new rates of 35 percent, 33 percent, 28 percent, 25 percent, 15 percent and 10 percent by 2006. The child tax credit increases $100 per child this year, but not again until 2005. It eventually will reach $1000 in 2010. The marriage tax penalty isn't addressed until 2005. The inheritance tax isn't axed until the 10th year. At the end of year 10, the entire package is set to expire, and we're back to today's tax code.

"It's sort of like a math problem," says Norquist. "What's the biggest possible tax cut you can get given it can only be this big in these years and so big in other years? The result is that it has to phase in and out in weird ways."

Those weird ways further complicate our already monstrously complex tax code. The on-again, off-again provisions also ensure that fights over extending provisions in the tax code will be fought nearly every year. If the economy avoids recession and Washington's coffers are full, the total tax cut this bill sets up will be much larger. That's because popular provisions such as the deductibility for college tuition and an adjustment of the Alternative Minimum Tax rates, now set to expire mid-decade, will most likely be extended.

But if the economy goes south, the only rate cuts you may receive are the ones you're getting this year. "Hillary Clinton could be in the White House before these tax cuts start kicking in," Stephen Moore, president of the right-wing Club for Growth, told The Washington Post. "A big concern is that we are going to have to fight all of these fights again."

The concern on the left, however, is that the bill is actually much larger than advertised. "The thing that always struck us was that he proposed this $1.6 trillion plan, the budget resolution clipped that down to a $1.35 trillion plan, and somehow you ended up with everything that was in the Bush plan. Plus you got the pension stuff and plus you got the education stuff," says Joel Friedman, a senior fellow at the Center on Budget and Policy Priorities, a left-of-center think tank that analyzed every permutation of the plan.

Friedman is referring to increased limits on education savings accounts, deductibility of student loan interest, tax deductibility for college tuition, and increased limits on 401(k) plans that were added to the bill in Congress. "By monkeying around with the numbers, they were able to squeeze more into a smaller package than Bush originally did." MIT economist and New York Times columnist Paul Krugman places the true cost at nearly $2 trillion.

Even more worrisome for Democrats is that they fired their entire rhetorical arsenal at this tax cut. It "benefited the rich," they said. It would hurt—or at least not help—the economy, would raid Medicare and Social Security, would counter the public desire for debt reduction and new programs, and on and on. Yet the package still passed in record time. Already facing what they consider an average loss of more than $100 billion a year in federal revenues, they fear that the entire package will be popular and made permanent.

The effects of this bill, therefore, will not only arrive in taxpayer mailboxes in late summer (and in more take-home pay starting in July). The effects will also be felt in this summer's appropriations process and in annual budget wrangling for the next decade. This is not a side effect, but one of the tax cut's core values, and the reason it was fought so bitterly. Republicans have demonstrated over the last few years that they are as incapable as Democrats of not spending taxpayer money. Like boozers who take a pill to make them sick should they weaken and drink, they need to deny themselves the opportunity to spend, regardless of which party controls the purse strings.

"We've said, 'Look guys, this money is not available to be spent,'" says Norquist. He points out that of the projected $5.6 trillion surplus, $2.8 trillion is slated to go to debt reduction and at least $1.3 trillion for tax cuts. That leaves $1.5 trillion for new spending, provided the surpluses meet projections. "This is why I never got too excited about the shape of this tax cut. This wasn't a pro-growth tax cut, it was a smaller-government tax cut."