In the early hours of May 23, the House and Senate both approved H.R. 2, a bill that reduces tax rates on wages, dividends and capital gains, among other things. The following day, before the legislation had even been signed into law, The New York Times pronounced it a failure. The front page of its business section carried this headline: "No Big Rush to Stocks After Cuts in Two Taxes."
This is typical of the way liberals treat conservative initiatives. Once they know that they cannot be stopped, they establish a measure of success for the initiative that is impossible to achieve. Liberals have been doing this for more than 20 years with the Reagan tax cut, falsely claiming that it was not supposed to lose any revenue because of its stimulative effect on the economy. By setting up such a ridiculous standard of success, they can thereby proclaim the Reagan tax cut to have been a failure due to the deficits of the 1980s.
It doesn't matter that no responsible economist, inside or outside the Reagan administration, ever said that the tax cut would instantaneously pay for itself. Nor does it matter that the economy did grow sharply after passage of the tax cut, even as inflation fell. All the liberal warnings about how tax cuts would be dangerously inflationary went right down the memory hole. Because deficits went up, the Reagan tax cut failed in the liberal worldview.
Now, liberals are trying to do the same thing with the Bush tax cut, implicitly claiming that it would lead to an immediate increase in the stock market the moment it passed Congress. Never mind that no supporter of the tax cut ever said this would happen, or that the bill had not even been signed into law yet, or that key details of the legislation were not even known on May 23. All that mattered was that stocks didn't go up the day the bill passed, and therefore it was a failure.
On Tuesday, May 27, the market reopened after Memorial Day and immediately jumped 180 points. So I carefully searched The New York Times the following day to see if the tax bill got any credit. Silly me. The rise was due entirely to some positive economic reports about housing and consumer confidence, according to the Times. No mention of the tax bill.
I have no doubt, however, that should the market fall at any time in the next several years, the Times will find some way to blame it on the tax bill. It will say that markets are worried about deficits and crowding out in financial markets. Never mind that markets already know full well today what the tax bill's impact on the deficit will be. When the market falls, the Times will still act as if this information suddenly emerged out of the clear blue.
When this day comes, the Times will seek out Wall Street-types like Roger Altman, who will solemnly proclaim that President Bush must raise taxes to restore confidence. It may mention that Altman was deputy secretary of the treasury to give his words added weight. But it will probably neglect to note that it was during the Clinton administration and that Altman is a large contributor to the Democratic Party.
Unfortunately, this sort of trick has worked in the past. Against his better judgment, Ronald Reagan supported a number of tax increases after 1981. But he was adamant about never raising tax rates. Sadly, this point was lost on his vice president, George H.W. Bush, who foolishly agreed to a tax rate increase during his administration in 1990. I think the first President Bush somehow convinced himself that tax increases were what caused the economy to grow in the 1980s and was disappointed when the economy didn't rebound immediately after he raised taxes.
Eventually, the economy did rebound and would have done so even if Bill Clinton hadn't raised taxes again in 1993. But because the recovery soon followed the tax increase, Democrats convinced themselves that this was the reason, rather than the normal workings of the business cycle -- what goes down must go up sooner or later.
I think some Democrats know that they got lucky and fear that Bush will have similar luck. The economy has been poised for an upswing for some time and may grow sharply over the next year. This probably would have happened even without another tax cut. But now Republicans will be able to say that it resulted from the tax cut, just as Democrats credited the 1993 tax increase for growth in the 1990s.
This could fuel further rounds of tax-cutting. That has Democrats really scared.