At Least The Tax Bill Got Through

Posted: May 30, 2001 12:00 AM
Well, there was some good news for Republicans in the switch of Vermont Sen. James Jeffords from Republican to de facto Democrat: It got the tax bill through conference in record time. Normally, House-Senate conferences on even the most routine tax bills are long, drawn-out affairs. But with Jeffords having promised President Bush that his defection would not be effective until after completion of the tax bill, Democrats had an enormous incentive to move with dispatch. Every day the tax bill remained in conference was another day Sen. Tom Daschle, D-S.D., was still Senate minority leader and not the majority leader. Indeed, Republicans may ultimately have Jeffords to thank for having any tax bill at all. It is possible that without the incentive of taking the majority upon its completion, Democrats might have dragged their feet on the tax bill conference all summer. And they certainly would have driven a much harder bargain on many provisions that they fought strenuously on the floor, such as the lower top rate. Thus, thanks to Jeffords, Republicans were able to salvage almost everything good that was in either the House or Senate version of the tax bill. This is a not inconsiderable achievement. The way the bill was going there for a while, it looked as if almost everything good in President Bush's original proposal was in danger. There was even talk of having him veto his own bill should he lose any more of it. In the end, I think that Bush got about as much as he could hope to get, given political realities. The most important achievement is to lower baseline revenues by $1.35 trillion over the next 10 years so that they cannot be spent. The importance of this fact will become more apparent in a month or so, when the Office of Management and Budget and Congressional Budget Office issue their mid-session budget updates. Without the tax cut, the prospect of large budget surpluses would have put irresistible pressure on Congress to spend. Now, with the tax cut in place, those surpluses will be much reduced, thereby reducing Congress' ability to buy votes with them. The second most important element of the tax bill is an across-the-board cut in tax rates. This guarantees that every taxpayer will see some reduction in their taxes over what they otherwise would pay. By 2006, the top rate will fall from 39.6 percent to 35 percent, the 36 percent rate will go to 33 percent, the 31 percent rate to 28 percent, and the 28 percent bracket will decline to 25 percent. The bottom 15 percent rate falls to just 10 percent. The importance of lower rates is two-fold. First, they raise the after-tax rate of return on productive economic activity, such as work, saving and investment. Someone in the top bracket, for example, who is now able to keep only 60 cents from a $1 increase in his income, will henceforth be able to keep 65 cents. This represents an 8 percent increase in his incentive to earn taxable income. In all likelihood, this increase in incentives will cause the taxable income of those in the top bracket to rise by more than the rate has been cut, meaning that federal revenues from this source will actually rise. In other words, the rich will pay more taxes at the lower rate than they would pay if rates are not cut. This is what has happened after every cut in the top rate, and it really puts a lie to the notion that lowering the top rate is some kind of giveaway to the rich. Second, as important as the economic growth effects of lowering tax rates, the political consequences are perhaps even greater. The top rate is a kind of cap on the most that government can take from the populace. A lower top rate is a kind of protection for the middle class so that they, who pay the bulk of all taxes, cannot be soaked too badly. Of course, the government always figures out new ways to do that. But the lower tax rates are, the harder it must work to pick taxpayers' pockets. The third really important provision of the tax bill is abolition of the estate tax. To be sure, it won't happen until 2010, and then theoretically it will be reinstated in 2011. But establishment of the principle is important. (The reason for reinstating the estate tax in 2011 has to do with idiotic budget rules. No one believes the estate tax will actually become law again in 2011 if allowed to expire in 2010.) On the other hand, there is no question that phasing-in estate tax repeal over such a long period is fraught with danger. The fate of the estate tax cuts in the 1981 tax bill illustrates this fact. In 1981, the top estate tax rate was 70 percent. This was to have fallen to 50 percent in 1985. However, Congress delayed this cut in later legislation. By the time Bill Clinton got into office, the lower estate tax rates were still being phased-in. In his 1993 tax increase, he put a stop to that, leaving the top estate tax rate at 55 percent. The point is that it is much easier to raise taxes by delaying or stretching-out tax rate reductions that have not yet taken effect than by legislating new higher rates. Indeed, Ronald Reagan was under enormous political pressure in 1982 and 1983 to delay phasing-in of the 1981 tax rate cuts, which were not fully effective until 1984. But once those lower rates took effect, there was no further talk of higher rates until Bill Clinton came along. Democrats may believe that their recapture of the Senate, thanks to the perfidious Jeffords, dramatically changes the political dynamics. But their talk of reversing Bush's policies rings even more hollow than Republican claims to reverse Clinton's after the 1994 elections, in which they took control of both the House and Senate. Those efforts quickly fell victim to Clinton's veto pen and their own ineptitude. The tax cuts are safe until at least 2004 -- and probably 2008 -- because, like Clinton, Bush has veto power to protect them. But until all the tax cuts take effect, they will remain vulnerable.