Evans On The Economy -- The Bush Tax Cuts You Won't See

Some pundits believe that just because the Republicans control the White House and both houses of Congress, major tax legislation benefiting higher-income individuals, investors and corporations will be passed. Don't count on it. Sure, since 1968 the Republicans have captured the White House every time except when the Democrats ran a Southern governor for President. However, for practical purposes there aren't any of those Democratic Southern governors around these days. Thus the track would appear clear for a resounding Bush victory in 2004, with substantial enough majorities in Congress that George W. will finally get the legislators to pass much of the program that he campaigned on back in 2000. But before you cheer too loudly for promised tax reform, tort reform, education reform, medical-care reform, Social Security reform and more conservative judges, remember Lyndon Johnson and his grand plans coming out of the sweeping Democratic victory over Republican Barry Goldwater in 1964. George W. is not Lyndon Johnson. And thank goodness, no one else is. Nonetheless, the 1960s show that a program rammed down the throats of the voters is likely to result in a major backlash. As a result, change is likely to proceed in a more orderly fashion, with the actual changes far smaller than suggested by the big promises of campaign rhetoric. I am making a number of political and economic assumptions. For example, I assume that by 2004, the U.S. economy will be in good enough shape that sluggish growth and high unemployment will not be major issues. And I assume that the Democrats, having learned that sluggish growth and high unemployment didn't play very well in 2002, are more likely to concentrate on issues that are more important to their rapidly diminishing core, such as pregnant pigs. (In case you are wondering where I got that one, Proposition #9 on the 2002 Florida ballot banned keeping pregnant pigs in small cages. It passed 55% to 45%). In other words, I assume the Democratic Party will blow itself apart in 2004. However, just as the Republicans regrouped in 1968 and eventually won majorities in Congress in spite of Nixon and Watergate, the Democrats will stage a comeback in 2008 if Republicans overstep boundaries. Admittedly, 2008 is still a long way off. But the Bushes would hardly like to have history identify them as the ones that handed long-term control of the Republic back to the Democrats. Consequently, I do not see any major changes in the tax code as long as the federal deficit remains in the range of the $250 billion projected for this fiscal year -- or of the $300 billion that seems likely for fiscal 2004. Such numbers make it more difficult for conservative Republicans to support further tax cuts for the "rich" or for business. What's more, the evidence is in and all the facts point in the same direction: The Bush tax cut of 2001 was not a very good idea. According to recent cross-sectional studies, only 20% to 25% of the Bush tax cut was spent -- whereas 80% to 90% of the Reagan tax cuts were spent in their first year. It's not that Bush should not have reduced taxes. It's that the same amount of tax-cut dollars could have been employed in so many better ways. Such as ending double taxation of dividends. Reducing the corporate income tax rate for firms who invest in the U.S. and create jobs here. And reforming the alternative minimum tax. That didn't happen. The deficit ballooned. And economics as well as politics is likely to be a major barrier to more tax reform. Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.