Wanna Lotta Tax Cuts?

by Mike Godfrey, Tax-News.com, New York

05 September 2001

With the President and Congressional leaders now back in Washington for the fall political open season, Senate Minority Leader Trent Lott and House Speaker Dennis Hastert yesterday met George Bush to discuss tactics in Congress, and pushed the idea of a capital gains tax cut from 20% to 15%. Many Republicans regretted that tax cuts for business weren't given higher prominence in the first round of tax cuts, which even the President now has to admit are not having the dramatic effect on the economy that he hoped for.

As well as a capital gains tax cut, Senators Lott and Hastert are recommending higher R & D tax credits, tax breaks for the energy industry, and a new push for fast-track trade negotiating authority which they see as helpful in supporting near-term US exporting prospects.

Although Mr. Bush is open to additional tax cuts this year, and probably agrees with the energy measures, he is more likely to stick with other measures proposed in his budget, such as tax incentives for charitable contributions, seeing a capital gains tax cut as being politically unwise. Other Republican leaders think it would help to re-ignite the stock market and would actually increase tax revenues short-term.

The President didn't immediately dismiss the capital gains tax cut: "I'm open-minded," he said. "I agree with the assessment that a capital gains tax would pile up some revenues early in the process." But Mr. Bush suggested that any proposal should wait until we "take a good look-see to make sure that the stimulus package that we're now implementing works."

A spokesman for Mr. Lott said the new 15% rate on assets held longer than one year would expire after two years, allowing Congress flexibility in approaching the economy during a critical period in which the existing tax cuts will start to have their effect. The senators are probably calculating that the President's populist tax cuts will help them to regain control of the Senate in next year's elections, so that they could make the capital gains tax cut permanent.

Meantime, though, they have to think of a way of getting the legislation through the evenly-split Senate, and would therefore attach it to a lollipop for Democrats such as an increase in the minimum wage.

The President also met yesterday with Democratic leader, Senator Tom Daschle of South Dakota to discuss the Senate appropriations process, and both said afterwards that they had agreed not to tap the Social Security program to pay the government's other bills, an agreement that economists insist is almost certain to be broken this year.

"I was looking simply today for his assurance that we're not going to do that, and he assured me of that," Mr. Daschle said afterward. "We look forward to working with him and seeking his guidance on how we avoid using Social Security."

Later on, when questioned by reporters about the social security surplus Mr Bush said: "I can say definitely every Social Security recipient is going to get their check, and that's what the American people need to understand," he said, refusing to answer the question directly. "I understand how politics works up here. There's always that scare tactic, trying to tell the American people that the budget process is going to lead them to not get their Social Security check. That's just ridiculous."

The surplus is in fact a nebulous concept, given the artificial and arbitrary way in which provisions are made for future social security needs. Today's surplus is simply what actuaries calculate needs to be reserved out of the general surplus to cover future costs - but tiny changes in assumptions would bring massively different figures. What's clear is that the cash is not needed today, so 'spending' some of it certainly won't hurt today's pensioners, and is within the 'assurance' the President gave to Tom Daschle.

Before returning to Washington, the President had made the most of his time on Monday in front of Union leaders and members, insisting that his tax cut was the right thing to do, and laying down a challenge to Democrats in Congress: "Make no mistake about it: Tax relief was the right thing to do, at the right time," Bush said. "The rebate checks are now hitting. People've got more money to spend or invest."

He attacked statements by several Democratic senators who want Congress to roll back parts of the tax cut that are to take effect in future years. The president, asserting that the government has "ample money in Washington, D.C., to spend," said he would attack such proposals as tax hikes.

The President received guarded, but warm support from Douglas J. McCarron, president of the United Brotherhood of Carpenters and Joiners of America, who said the president and his administration "have shown a real interest" in worker training.

"It's no secret: This isn't an administration we're going to agree with all the time," McCarron said. "But Mr. President, we didn't agree with the last administration all the time, either. But we do share a number of basic concerns and common goals. . . . A decent job, a home to raise our families and the ability to care for them are all common goals of every American."

That will have told the President that he did the right thing with his tax cut, whatever messages he receives in the fevered hothouse of Washington.

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