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George Bush Faces Critical Decisions On Taxes

Mike Godfrey, Tax-News.com, Washington

15 December 2000


Now that George Bush is beginning to put his administration team in place, Washington is in a ferment of speculation, and nowhere more so than in guessing who will be Treasury Secretary. Rumours that Bush would reach out across party lines to invite Larry Summers to stay on for a few months can safely be ascribed to mischievous Democrat scribblers, but reports of Republican talent scouts seen prowling Wall Street are more credible. Whoever gets the top job at the Treasury will however be in thrall to Lawrence Lindsey, a former Fed governor, who will play the role of economic maestro, probably from a position in the White House, and of course to Alan Greenspan at the Federal Reserve, now more than ever a monument of economic credibility.

In addition, with an evenly-divided Congress, economic policy-making in the new administration will require a balancing act of masterly skill, and one should not expect outcomes to depart much from the middle ground. Although Vice-President-elect Dick Cheney said two weeks ago that the US was 'on the front edge of a recession' and that large tax cuts might be needed, House Speaker J. Dennis Hastert said yesterday that he did not favor President-elect George Bush's much-touted $1.3 trillion across-the-board tax cut.

Instead, Mr. Hastert said he would push for the House to act on tax cuts aimed more narrowly at married couples and heirs (meaning the 'death' tax presumably), an approach that had bipartisan support this year in Congress but was rejected by President Clinton. "I would think that the first few pieces of tax relief that we attempt will be incremental," Mr. Hastert said. "But we haven't really sat down and talked about this in any depth. We are most successful, especially in tax policy, when we start to take tax ideas and do them a piece at a time," he added.

Lawrence Lindsey is known to believe that tax cuts are needed in the interests of structural reform of the economy, but thinks that they are an ineffective way of addressing a short-term demand management problem. He approves of Alan Greenspan's management of the economy, and is unlikely to make the mistake of interfering in the Fed's demand management strategy - something tried unsuccessfully by George Bush's father in the last republican administration.

Wall Street expects that Mr Bush will offer a trimmed-back version of the $1.3 trillion tax cut in exchange for some of the spending increases espoused by the outgoing administration, hoping to achieve bi-partisan agreement in Congress. Senator Charles E. Grassley, Republican of Iowa, the future chairman of the Finance Committee, which oversees tax legislation, also advocated the step-by-step approach. Mr. Grassley said the political reality of a 50-50 split in the Senate would make the more ambitious plan difficult to pass, at least so long as the economy stays strong.

So far as is known, there has yet to be any direct contact between Mr. Bush and Congressional leaders. An aide, Ari Fleischer said: "It was right when he announced it (the tax cutting plan), and he believes it is even more right in the economic downturn. And he hopes to work with the Congress in bipartisan spirit to implement it."

One player in the decision will of course be the economy, both in terms of the size of the projected surplus, which is one more time expected to be larger when the next set of figures is released, and in terms of what happens to growth. Some Republicans are even half-welcoming to an economic downturn which would increase the chances of getting a large tax cut.

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