Virtually everyone agrees that George W. Bush confronts a rapidly weakening economy as he assumes the presidency. Cutting marginal tax rates was at the top of his campaign agenda, and he has been admirably tenacious in making it clear that it is and will continue to be his first major policy initiative.
Treasury Secretary Paul O'Neill says it will take six weeks to get tax legislation to Congress, but in fact it would take a team of drafters no more than 48 hours to put the Bush proposal into legislative language. A bill could be on Capitol Hill next week, and the Congress could immediately begin holding hearings on the program. Democratic Sen. Zell Miller has indicated that he will join Phil Gramm in co-sponsoring the bill.
While it's important for the president and Congress to act quickly, it's even more important for them to do the job right. The president's package cuts marginal tax rates across the board and stops making death a taxable event. Senate Majority Leader Trent Lott adds the idea of slashing the capital gains tax rate to 15 percent, and House Majority Leader Dick Armey suggests expanding IRAs and 401(k) retirement accounts. Above all, the legislation must be retroactive to Jan. 1.
These measures would enhance our capital markets - particularly if capital gains are indexed for inflation - and encourage work, saving and investment. They are consistent with a long-term tax reform agenda of lower and fewer marginal tax rates and a radically simplified tax code. If we want the economy to remain on a noninflationary, high-growth path long after this economic slowdown is over, we must increase the after-tax rate of return on productive activities.
We supply-siders would like to see the president go farther, starting with explicit repeal of the 1990 and 1993 tax rate increases, sold to the public as necessary to balance the budget but which instead prolonged the sluggish economic recovery from the 1990-91 recession. But when the high-tech productivity revolution took off and the Republican Congress buttressed it by cutting the capitol gains tax rate, revenues zoomed beyond budget balance and turned into huge surpluses.
Our goal should be the best possible tax policy, regardless of what the critics say cutting tax rates will "cost." Revenue estimators on Capitol Hill and in the Treasury Department always overestimate how much revenue will decline after a tax rate cut (probably by as much as one-third in the case of Bush's proposals) because they ignore the positive dynamic effect cutting marginal tax rates has on economic growth.
But even accepting static revenue estimates as the starting point, the Bush tax proposals would leave huge budget surpluses even if they were enhanced by a capital gains tax rate reduction, an expansion of IRAs and 401(k) accounts and deeper marginal rate reductions. Sen. Pete Domenici says that the forthcoming Congressional Budget Office estimates will show cumulative surpluses of nearly $6 trillion over 10 years. That's reason to think bigger on tax cuts, not smaller.
Bush should listen to his congressional allies, Lott and Armey. Ways and Means Committee Chairman Bill Thomas is also important because it will be in the House where the president's tax program will first take flight. Armey, who is forging a coalition to support the president's tax agenda and to make tax rate reductions effective back to Jan. 1, understands the need to move quickly and boldly.
O'Neill told the Senate Finance Committee during his confirmation hearing that "It's desirable to have a situation in which we send it back when we don't need it, but we should be in balance even with a weak economy." That is the same kind of thinking that got us into trouble back in 1990, when taxes were raised ostensibly to "balance the budget" just as the economy was weakening.
Marginal tax rates have an enormous effect on people's decisions about the next dollar earned, saved or invested. When tax rates are too high, people make decisions based more on tax considerations than on economic considerations. Moreover, it is lunacy to keep tax rates artificially high just to retire debt, especially in the midst of a weakening economy. That's why I was so pleased when he stood up for across-the-board rate cuts in the face of class warfare rhetoric.
Misunderstandings always surface with a new administration, but it's too bad they surfaced so early in tax policy. The stakes in this issue are higher than ever, and bipartisan awareness of the need for major tax rate reduction is growing. Pro-growth tax cuts can be the fundamental building block of a new bipartisan consensus while promoting economic prosperity for everyone. The time is now, and the need is immediate.