Bush Presses for Tax Cut

Jan. 4, 2001 -- President-elect George W. Bush expressed newfound confidence in the economy this afternoon, but said he still intends to push Congress for his proposed $1.6 trillion tax cut.

“I am very optimistic about our position in the world,” Bush said after the end of a two-day summit with business leaders in Austin, Texas. “We’re concerned about the short-term economic news, but long-term I’m optimistic.”

But after weeks of warning about an impending economic downturn, Bush said his tax cut is “going to be necessary to help keep this economy strong.”

Upholding a Campaign Pledge

In pushing for across-the-board reductions in income tax rates, plus a possible repeal of the estate tax and a reduction in rates for married couples, the president-elect is not only attempting to keep a major campaign promise, but to satisfy conservative Republicans.

Bush said today he is “confident the size of the tax relief plan” is appropriate. But with estimates varying about the size of the blossoming budget surplus, Bush will face pressure from Democrats and Republicans in Congress to horse-trade on the size and shape of the cuts.

“I think everybody’s going to be looking for a combination of additional spending plus a tax cut,” says political analyst Stu Rothenberg. “Ultimately it will be a package.”

And Bush has pledged additional spending measures that would also eat into the surplus.

“There has to be more spending on education,” adds Rothenberg. “He’s committed himself to that.”

White House budget projections released last week show the surplus at roughly $2 trillion, after Social Security and Medicare are accounted for, but some analysts dispute those figures.

Changing Rationale, But the Plan Remains the Same

Even as Bush remains firmly committed to the tax cut, his rationale for enacting it has changed. During the campaign, when economic projections were rosier, Bush said a reduction in the basic income tax rates would be a way of giving citizens money that was rightfully theirs.

“The surplus is the people’s money,” Bush said frequently during his stump speeches.

But after Election Day — and even before the outcome of the presidential race was fully resolved — Bush and his running mate, Dick Cheney, had begun saying that a tax cut would be necessary to stoke an economy showing signs of cooling, a position they continue to play up.

“I think it’s really important for members of the Congress to understand that the tax relief plan I put forward is an integral part of economic recovery,” Bush said Wednesday.

Fed Move Complicates Matters

Complicating things is the Federal Reserve’s unexpected decision Wednesday to cut a key interest rate by half a point, a move that has already given the stock market a significant boost.

Some analysts consider the move, backed by Federal Reserve Chairman Alan Greenspan, sufficient to spur economic growth.

“Economically, a tax cut isn’t really a measure by which we adjust the economy in the short run,” says David Ingram, a senior economist at Economy.com. “The effects of a tax cut now would not be felt immediately.”

But predicting the ups and downs of the economy is an inexact science, and others say it is possible the economic downturn could linger long enough to justify the action.

“I think the economy’s weak enough so that by the time he’s installed as president and Congress is in session, things will look bad enough that we might need it,” says Ed Yardeni, a strategist at Deutsche Bank Securities in New York. “But the reality is we often get tax cuts after we need them.”

As for the interest rate cut, Bush interpreted it as Greenspan acknowledging his rate cut may need to be supplemented with a tax cut.

“One of the messages Mr. Greenspan sent was that we need bold action, not only at the Fed, but I would interpret that to mean bold action in the halls of Congress to make sure this economy stays vibrant,” Bush said.

And today, Bush countered critics who said the Fed’s action was a signal that he should butt out of trying to legislate any fixes to the economy.

“I think he recognized that there are warning clouds on the horizon for oureconomy and he took action,” Bush said. “And, no, I don’t think he’s taking any — I don’t think he’s making any statement about fiscal policy from the actions he took.”

Larry Lindsey, a former Federal Reserve governor named Wednesday as a top White House economic adviser, argued today that a tax cut would spur spending in a way that the interest rate drop could not.

“The consumer needs money in his or her pocket right now, and the best way to do that is with a tax cut,” Lindsey said on ABCNEWS’ Good Morning America.

The Arguments Against

Opponents of Bush’s plan see numerous drawbacks to the theory that lower tax rates will spur growth.

For one thing, a tax cut budgeted by Congress this year would not take effect until 2002, by which any possible recession might have ended.

Greenspan himself has said in the past that although he wants to cut taxes, reducing the federal debt should be a higher priority.

“It’s my second priority,” Greenspan told the House Banking Committee last February, when asked about tax cuts, indicating paying down the debt was a surer long-term was of stimulating growth.

Many Democrats also are skeptical about the Bush proposal, saying it would reward the well-off at the expense of middle-class and working-class taxpayers.

“I think we need a tax cut,” Sen. Richard Durbin of Illinois said Wednesday. “I hope it is progressive so it helps lower- and middle-income working families primarily, instead of the wealthiest among us.”

Under the Bush plan, a family of four with an income of $35,000 would receive a $1,500 tax cut; the same family with an income of $75,000 would net a $2,500 tax cut.

A single parent with one child making $22,000 would have taxes reduced by $1,000, while a single parent with two children and a $32,000 income would gain $1,500.

But the plan also would limit the top income tax rate at 33 percent, down from the current 39 percent. With this reduction, plus a proposed repeal of the estate tax, the wealthiest 1 percent of Americans would reap about one-third of the total tax cut.

What Do Democrats Want?

Despite these objections, the good news for Bush is that congressional Democrats may be warming to his plan. House Minority Leader Richard Gephardt suggested Wednesday that he would be willing to negotiate a bigger tax cut than Democrats have previously considered.

“I think we need a tax cut,” Gephardt, D-Mo., said Wednesday on NBC’s Today show. “I don’t know the exact size. It may be that it has to get bigger because the recession is looming and we’ve got economic worries out there.”

Still, Bush may need to compromise. Even the Republican speaker of the House, Dennis Hastert of Illinois, has said a piecemeal approach to lowering taxes may be in order.

Moreover, congressional Republicans found more success in the last term by trying to push through a series of cuts, rather than going for one big tax cut, as they had attempted in earlier Congresses.

That could mean Congress will repeal or reduce estate taxes or rates for married couples, while leaving income tax rates largely intact. Last year, a congressional repeal of the estate tax was vetoed by President Clinton.

“I think we can work out a compromise where everybody gets some of what they want,” said Gephardt. In that case, Bush might be forced to decide whether or not some is enough.

The Associated Press contributed to this report.