President Bush won a victory in the Senate last week when it agreed to support a $350 billion tax cut that includes temporary elimination of the double taxation of corporate income. But it is not at all clear what this victory accomplishes except to allow some White Houses staffers to keep their jobs.
The Senate legislation will do little for the economy and is incompatible with the House bill. Rather than attempting to narrow differences with the House in the Senate, the White House insisted on making them as sharp as possible. As a consequence, the conference between House and Senate negotiators will be unnecessarily contentious, with a distinct possibility than no bill will ever emerge. This will make President Bush’s “victory” a hollow one indeed.
How did we get to this point? A lot of the problem dates back to the earliest days of the Bush Administration, when a conscious decision was made to blur the administration’s economic philosophy. On different days, it used supply-side arguments for its economic program, on other days Keynesian ones. While all administrations use contradictory arguments for their policies at times, they usually know themselves which ones they really believe in.
As time has gone by, I have become less and less certain whether this White House really knows what its economic philosophy is. One day it is adamant about the need for free trade; the next it is imposing tariffs on steel and supporting huge subsidies for agriculture that directly undermine its own trade agenda. In terms of tax policy, it talks about the importance of incentives and investment one day, and on the next it is promoting Keynesian-style “stimulus”.
If this were just a matter of marketing confusion, I would be less concerned. But the contradictions are inherent in the policies themselves. Good long-term reforms like eliminating double taxation on corporations were combined with give-away kiddy credits and other provisions that have no place in a properly designed tax system. Some provisions will increase growth, while others just lose revenue and will have no stimulative effect.
I suspect that these inherent flaws in the design of the administration’s tax plan are behind its unwillingness to release the dynamic revenue estimate that was made by Treasury and White House economists. Although completed weeks ago, it was deep-sixed by the White House legislative affairs shop, which is headed by a trained economist, David Hobbs. The only explanation can be that he thought it would hamper his ability to get votes on Capitol Hill. Perhaps it showed that the plan really wouldn’t have much impact on jobs—which has become the administration’s mantra—because it wasn’t designed for that purpose.
Although administration spokesmen and supporters continue to say that the tax bill will create 1.4 million new jobs, this is really not true. That estimate was based on the administration’s original $726 billion plan. With that plan now cut by more than half, it is basically dishonest to keep using the 1.4 million figure. It is doubtful that the Senate tax bill will create more than a trivial number of new jobs.
A key reason for my pessimism about the job-creating potential of the Senate bill is that all its key provisions sunset (expire) after a couple of years. This was done to fit into arbitrary budget targets. But the result is that corporate executives and investors are left in limbo, uncertain about whether to change their behavior in light of the new tax regime. But if they don’t change their behavior, then there will be no economic benefit. It will all be a waste of effort.
Luckily for Republicans, the Democrats have no program whatsoever. Because something always beats nothing in Washington, the White House has gotten a pass. If Democrats had any sense, they would have proposed a government jobs and public works program like they always did in every economic downturn prior to this one. Such programs don’t work, but they are plausible and politically popular. Because they have become obsessed with the budget deficit, Democrats instead have just attacked Republicans over that even as inflation and interest rates have fallen to their lowest levels in decades. Consequently, no one cares.
The White House will have its work cut out for it when House and Senate conferees meet this week. How it will play its cards is hard to say, but judging by its handling of the Senate it will insist on full elimination of taxes on dividends even if it is for just one day and even if every administration economist agrees that it will have no impact on jobs or growth whatsoever. As a consequence, good, growth-oriented tax measures in the House bill, such as reducing the capital gains tax, could be left on the cutting room floor. That would be too bad.