The Tax Cut: Positioning President Bush for the 2004 Election

There is remarkable unity in the Republican caucuses of both houses of Congress these days.

Almost all Republicans supported President George W. Bush's growth package in the House.

In the Senate, Majority Leader Bill Frist lost three Republican votes (Chafee of Rhode Island, Snowe of Maine and McCain of Arizona) and picked up two Democrats (Miller of Georgia and Nelson of Nebraska) and so the vote was 50 to 50. Vice President Dick Cheney cast the tie and thus the bill goes to President Bush for his signature.

The president initially proposed more than $700 billion in tax cuts over 10 years. In a numerical sense, it would have been the largest tax cut in U.S. history. But as a percentage of the gross domestic product, President John F. Kennedy's tax cut of 40-some years ago was much larger.

This exercise in supply-side economics is a major gamble for the president and his party. Right now, while the president is well thought of, with approval ratings still in the mid-60s, his re-elect number is only 47 percent.

In other words, right now only 47 percent of the people are willing to say they will vote for him next year. Any time an incumbent falls below 50 percent, that incumbent is in danger.

Although the people admire the president's leadership, they are concerned about jobs as well as terrorism. If the election were just about terrorism, the president would most likely win in a landslide. But if the election is about the economy, it is quite possible that the right Democrat could defeat the president.

The opposition party did everything in its power to see to it that this jobs and growth bill was defeated. Thanks to excellent work by Speaker Dennis Hastert, R-Ill., Majority Leader Tom DeLay, R-Texas, and Majority Whip Roy Blunt, R-Mo., in the House and by Majority Leader Frist, R-Tenn., and Majority Whip Mitch McConnell, R-Ky., in the Senate, the Republicans held together.

Defections by Republicans were held to the absolute minimum. But the Republicans also picked up a few Democrats, which proved to be absolutely critical in the Senate. As a result, the bill was passed by both houses.

The way the Senate and House negotiators eventually cobbled together a bill, there is actually more stimulus to the economy in the next two years than there would have been if the president's original bill had been passed.

If it works and the Republicans keep control of the Congress and perhaps add a couple of Senate seats in next year's election, then these tax cuts, which are scheduled to expire in a couple of years, stand a good chance of being made permanent.

Now if this bill works, then the economy will grow and the Democrats will be hard pressed to defeat the president. The reason they were so vocal against the legislation is their fear that it might work. If it fails, then they are in the ball park.

The Treasury Department says that accelerating the 2004 and 2006 rate cuts beginning in July of this year will provide 32 million taxpayers an average tax cut of $1,060.

Then accelerating the expansion of the 10 percent bracket will reduce taxes for 69 million taxpayers, on average, by $76.

The marriage penalty relief this year will reduce taxes for 34 million married couples by an average of $589.

And increasing the child credit to $1,000 will provide 26 million families with an additional average cut of $623.

Then lowering the tax rates on capital gains and dividend income will reduce taxes by an average of $798 for 26 million taxpayers with income from these two sources. Among those will be 7 million elderly taxpayers whose taxes will decline $1,088 on average.

Treasury Secretary John Snow said "with agreement on President Bush's Jobs and Growth plan, the elements are there for the economy to continue its recovery in the second half of the year." He pleaded with Congress to send the bill to President Bush's desk as quickly as possible.

"The economy can't wait another day to get the boost it needs," Snow said. Translation: unless we get this stimulus going, it won't have the needed impact on the election.

And that is clearly what is at stake here. The Democrats, who absolutely do not believe in supply-side economics, will now get a chance to see if their opposition has merit. It is strange, since they claim that this measure will be an abject failure, that they went to such lengths to try to oppose it.

If it is going to be the disaster they claim it will be, you would think they would want it to pass. Indeed, this was one measure they couldn't filibuster under Senate rules. Otherwise, since the Republicans lacked 60 votes, it would have been dead in the water.

By the way, because the percentage reduction in income taxes is greatest for families with incomes under $50,000, these families will pay a smaller share of the total income tax burden than they do under current law. Conversely, families with incomes of $100,000 or more receive a smaller than average percentage reduction in income taxes so they will pay a larger share of the total income tax burden under the new law than under current law.

Under the Act, the share of income taxes paid by families with income of $100,000 or more will rise to 73.3 percent. So much for this tax cut benefiting only the rich. The Treasury Department says that those earning over $200,000 will pay – on average – $99,000 in federal taxes. Take those in the lowest bracket (under $30,000). They pay no income taxes and receive refundable credits of, on average, $411.

When those of us in the higher brackets pay 100 percent of the income taxes and those in the lower brackets get unearned refunds, it will still be said by the liberals that any tax cut helps the rich. Well, that will be true, since only the "rich" by their definition will be paying any income taxes at all.

The enactment of this tax cut bill was quite dramatic and it took the personal intervention of the vice president to get it done. The Republican Study Committee, under the leadership of Rep. Sue Myrick, R-N.C., and staff director Neil Bradley made the best of a bad situation.

They insisted on no tax increases (the Senate had many) and helped to lay out the bill in such a way that the maximum effect will be played out before the end of 2004.

Also, Senator Chuck Grassley, R-Iowa, chairman of the Senate Finance Committee, deserves a lot of credit. He was faced with an impossible situation and he hung in there to the bitter end. Then when the bill was finally put together, the leadership took over and got it passed. It was all very dramatic.

What will be even more dramatic is what will really happen to the economy between now and November 2004. Stay turned. We can likely give you some advance election returns.