A tax-cut battle royale is shaping up in the White House, with
President Bush's economic team divided over which measures will best
strengthen incentives for economic growth and stock-market investment.
Economists Larry Lindsey and Glen Hubbard continue to favor a
broad-based tax-cut package that would boost stock-market values and
increase after-tax cash flows for businesses and families. Those two made
similar arguments a year ago, but they were overruled by Paul O'Neill and
Mitch Daniels -- the Bush advisors who favor a much more austere economic
strategy based on deficit reduction.
Treasury Secretary O'Neill has never been a friend of
supply-side economics. He has illustrated this by way of numerous
hip-shooting comments since joining the Bush team. Though he professes to
favor a thorough overhaul of the corporate tax code, perhaps even its
elimination, his position is much more narrow and smacks of social
engineering. At a time when deep cuts are receiving deep attention, O'Neill
is appealing for very light, targeted tax relief, such as child tax credits
and reductions in the marriage penalty. More, he has never set a detailed
economic blueprint down on paper. He's all talking points and no package.
However, the bigger disappointment is the recent thinking of
Daniels, Bush's budget director, who has seemingly moved from the
supply-side camp to the deficit-obsessed camp. He has failed to take
advantage of several public opportunities to forcefully advocate an investor
tax-cut package, and he's too quick to point out the deficit pitfalls of
broad-based tax relief.
Of course, key White House decision-makers, including the
president, have not yet weighed in. As is the case in so many areas, Vice
President Dick Cheney's view on a tax package will be crucial. Cheney's top
staffers are enthusiastic about broad-based tax cuts. In fact, they like
Ernest S. Christian's "five easy pieces" proposal that is now circulating
Christian, a veteran Washington tax reformer, believes that
fundamental reform encompasses lower marginal tax-rates, 100 percent
first-year expensing of business-equipment purchases and a major expansion
of Roth IRAs that permit after-tax savings deposits that are never taxed
again. The other two pieces of his plan include a reduction in the double
tax on corporate dividends by equalizing the treatment of debt and equity,
and measures that would exclude U.S. exports from double taxation overseas.
Other welcome ideas making the rounds include the elimination of
the alternative minimum tax, ending the inheritance tax, expanding the
investment loss deduction for stock-market investors, and equalizing the
capital-gains treatment of stock-market equities and residential real
Our corporate chieftains are also chiming in -- finally. In a
remarkable speech to the U.S. Chamber of Commerce, FedEx CEO Fredrick W.
Smith distanced himself from the usual Business Roundtable whining and
hand-wringing when he advocated a specific program of business
deregulation -- including litigation reform to counter excessive
class-action lawsuits -- along with supply-side tax cuts. He also envisioned
a new capital-gains tax schedule that includes the current 20 percent rate
for assets held for one year, then a new rate structure that drops off 5
percent a year to zero after a five-year holding period.
The ideas are all out there. And with continued indecision in
the White House, Sen. Don Nickles may well become the key player who tips
the policy scales toward deep tax cuts.
Nickles, a veteran senator long committed to lower tax-rates and
firm government-spending restraint, has given up his post as deputy majority
leader to assume the chairmanship of the Senate Budget Committee. In this
new capacity, he may organize a huge budget-reconciliation package that will
include new tax-cut measures and (conceivably) prescription-drug entitlement
reform. Such a reconciliation package will require a simple one-vote
majority on the floor of the Senate.
Rep. Jim Nustle of Iowa, Nickle's counterpart in the House,
agrees that a reconciliation approach can overcome potential tax-cutting
roadblocks in the complicated legislative process. Both men also favor a
dynamic-scoring metric to properly account for the positive growth effects
of reduced tax rates on expanded national income.
If Nickles can gather solid backing from his
conservative-leadership colleagues -- Mitch McConnell, John Kyle, Rick
Santorum and Majority Leader Trent Lott -- the Oklahoman may bring President
Bush on board for a meaty pro-growth tax package. As for certain weak-kneed
members of the president's high-economic command, they won't know what hit
Two years ahead of the presidential election, Don Nickles may
hold the key to a major stock-market rebound and a strong economic revival.