President Bush has won a resounding political victory with his $1.35 trillion tax cut--for now. But most of the provisions may never take effect. The tax bill is heavily "back-loaded." Only $203 billion of the cuts actually apply between now and 2004. Most wait until after 2007. The cuts that take effect in the next three years are the relatively popular ones that provide modest benefits to most taxpayers. The ones that go primarily to the superrich kick in late in the decade.
Although Tom Daschle (D-S.D.), the new Senate Majority Leader, is making conciliatory noises, expect the Democrats to play hardball on taxing and spending as the elections of 2002 and 2004 approach. For example, an effective prescription drug program under Medicare would cost around $80 billion a year. As they go into the 2002 elections, the top priority for Democrats will likely be a comprehensive drug benefit, paid for by rescinding narrow tax cuts that benefit exclusively the very wealthy, before those cuts ever take effect.
Another possible change in the tax bill just passed would be for the Democrats to strike a new bargain with the Republicans. In exchange for keeping relief from what the GOP calls the "death tax" on very large estates, the Democrats would insist on a remedy for what I've termed the "predeath tax" on the middle class. This is the "spend-down" of assets required to qualify for nursing-home care under Medicaid. Middle-class families spend down about $30 billion a year getting rid of their worldly assets so that they can qualify for Medicaid. Don't they deserve an exemption to protect their wealth and pass it down to the children as much as the very rich? This one should be a slam dunk for the Democrats.
Can we really think about rescinding part of the tax cut before the ink is dry? Ronald Reagan, who had far more of a mandate than George W. Bush, presided over a huge tax cut in 1981. But Congress then raised taxes three times, in 1982, '83, and '84, reversing some of the cuts. Why? Because even Reagan's budget officials recognized that the excessive 1981 tax bill was causing unsustainable deficits.
VOODOO MATH? Congress acted in 1986 to close some of business' favorite loopholes, and again raised taxes, in 1990, because of mounting deficits. That's when George Bush Sr. had to eat his infamous words, "Read my lips, no new taxes."
No tax cut is ever sacrosanct, and this one is particularly vulnerable politically. For starters, the sanguine surplus projections may not hold up. The huge state budget surpluses of recent years already are disappearing. Who can be sure the federal surplus will be there 10 years from now?
Then there is the issue of cost. The real 10-year cost of the tax cut is well over $2 trillion when you add increased interest on the national debt caused by the tax giveaways and expensive technical fixes that Congress ducked this time but must address soon. For example, the alternative minimum tax was intended to prevent the very rich from piling up loopholes. It currently hits fewer than 2 million taxpayers. The lower rate structure in the tax bill will expose over 35 million households to the bite of the alternative tax. Everyone expects Congress to repeal this unintended consequence--but that will add $300 billion to the bill's 10-year cost.
CLASS POLITICS. Republican tax mastermind Grover Norquist persuaded business lobbyists to fall in line this year behind the Administration's strategy of pursuing a clean bill, unencumbered by Christmas tree special-interest provisions. In return, he promised business groups and supply-siders that they would get their reward next year--capital-gains cuts and corporate breaks. "This is just the beginning," he told me. "We're coming back for more."
Then, of course, Bush also wants partial privatization of Social Security, which would drain much more of the surplus--up to $1 trillion.
In the end, the provisions of the tax bill with the weakest political traction may never take effect. Rather than adding more cuts for the rich, Congress could well repeal some. The repeal coalition will include fiscal moderates worried about budget balance and liberals who want less tax relief for the affluent and more popular social spending for the middle class. Just this month, the Republican-controlled Congressional Budget Office reported that from 1979 to 1997, inflation-adjusted incomes of the wealthiest Americans increased by more than 100%, while middle-class incomes grew by 10%, and incomes of the poor declined. So, when taxes are discussed next time around, class politics could help the Democrats.
For now, the Republicans insist that the tax cut is impregnable. But even tax cuts are not sacrosanct. Democrats were also in shell shock during Reagan's first year, yet by 1982, they had recovered their wits. This time, the defection of Senator James M. Jeffords (I-Vt.) is their tonic. Just as the tax cut is back-loaded, President Bush's political triumph may be front-loaded.
Robert Kuttner is co-editor of The American Prospect and author of Everything for Sale
Get BusinessWeek directly on your desktop with our RSS feeds.
Add BusinessWeek news to your Web site with our headline feed.
Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video.
To subscribe online to BusinessWeek magazine, please click here.
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version
