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Jewish World Review August 24, 2000/ 23 Menachem-Av 5760

Lawrence Kudlow

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Consumer Reports

Tax Cut Issue in Campaign -- TAX CUTS may be the sleeper issue of this campaign. President Clinton just vetoed marriage-penalty tax relief, calling it a "fiscally reckless tax strategy"-- but the public disagrees. Poll after poll shows a new shift of voter preferences toward tax cuts.

A recent Wall Street Journal/NBC poll shows that voters now prefer using federal budget surpluses to cut taxes across the board, rather than reduce the national debt. The margin is 42 percent to 32 percent, a significant shift from a few months ago. A Zogby poll finds that 63.7 percent of self-described independent voters believe they are overtaxed, and nearly half believe a 10 percent to 20 percent personal tax rate would be fair. A Rasmussen survey shows that 69 percent want to end the marriage penalty and kill the estate tax, but by a 2 to 1 margin (62 percent to 29 percent) Americans prefer a tax cut for everyone.

Here's the real surprise: A recent Business Week/Harris poll found that minority voters are far more supportive of tax cuts than are white voters. Overall, 78 percent of blacks and 68 percent of Latinos say cutting taxes is "very important" to them.

Why this tax-cut renaissance? The surplus has a lot to do with it. The Congressional Budget Office now predicts non-Social Security surpluses of $2.4 trillion over the next ten years, with Social Security surpluses running to $2.2 trillion. This CBO re-estimate marks the third upward revision in just the past six months, and it is having a big impact on public attitudes toward tax cuts. The argument that we can't afford them loses force with every new surplus number.

A smart GOP congressional strategy is also helping. Instead of last year's misunderstood, seemingly excessive $792 billion tax-cut package -- which Clinton vetoed, without provoking any public outrage -- Republicans this year divided up the omnibus tax-cut bill into specific parts. The strategy worked: By the time of the convention in Philadelphia, the GOP had already succeeded in passing bills ending the marriage-penalty tax and the estate tax, cutting the 85 percent tax rate on Social Security benefits, expanding super-saver IRA and 401(k) accounts (in a stunning 401-25 House vote), and lifting the taxable-earnings cap on seniors' income (a bill that Clinton signed into law in the spring).

House Rules committee chairman David Dreier, one of the architects of the Republican House tax-cutting strategy, says: "As these surplus numbers went up astronomically, people concluded that, hey, shouldn't just a little bit of that come back to me? And we learned that people relate to specifics. For these tax cuts, the political importance of the smaller pieces became greater than the original tax-cut package."

House Speaker Dennis Hastert was a tax-cut hero in his advocacy of this new strategy. Though an ardent tax-cutter, Ways and Means chairman Bill Archer was initially unenthusiastic; tax-writing committees traditionally prefer big bills to small bills. But Hastert was able to persuade Archer of the political merits of small-is-beautiful.

And the public was receptive. Despite talk of how the tax bite has diminished over the years, it is now, in fact, pinching some voters even harder. Rising wages and salaries are pushing middle-income people from the 15 percent tax bracket to the 28 percent bracket -- and, with increasing frequency, right up through the 31 percent bracket to the 36 percent bracket.

This real income "bracket creep" is punishing successful work with excessively progressive taxation. Largely as a result of the bracket creep, personal tax payments over the past year have increased by a startling 12.2 percent, which is over four times the inflation rate. Overall, national income is rising at a 6 percent inflation-adjusted pace, but after-tax personal income is growing only half as fast (3 percent). Meanwhile, the surging stock market of recent years has flattened out through the first two-thirds of 2000, so the income from market profits has at least temporarily disappeared. And tax payments made this past April 15 for prior-year capital gains, bonuses, and salary hikes deflated pocketbooks and wallets "creating major tax sticker-shock."

All this would certainly put folks in a tax-cutting mood. The cause also benefits from leftover good feelings about the Reagan tax cuts, which continue to create economic benefits to this day. (Notice how Gore, after the primaries, is no longer attacking "Reaganomics"?) By lowering the top personal tax rate to 33 percent from 40 percent, dropping the basic middle-income bracket to 25 percent, and pulling the 15 percent bracket down to 10 percent, George W. Bush has adopted Reagan's principles. This program -- including the plan to allow people to divert 2 percent of their Social Security payroll tax to retirement accounts -- could increase the U.S. economy's long-run growth potential from the current 4 percent to around 4.5 percent.

But on the campaign trail, Bush sells his tax-cut plan less on the Reaganesque growth model than on the idea that Washington shouldn't gobble up all the surplus money: "The surplus is not the government's money. The surplus is the people's money." Bush is also establishing what he calls a moral principle that the federal government should not take more than one-third of taxpayer incomes. Bush campaign insiders say that the candidate originally wanted the limit to be one-quarter of taxpayer incomes -- and that if surplus numbers continue to improve, he might decide to push down the top rate even further.

Bush's argument is indeed principled rather than prudential, and fits well with today's prosperity (the governor repeated the phrase "on principle" again and again in the tax section of his acceptance speech). Bush's moral case for tax cuts is important, but that doesn't mean the practical one has disappeared: Tax cuts will still help expand the information economy. Just as important, they will stop Washington from launching a Great Society-type entitlement binge that could derail the prosperity.

In the end, the biggest reason for the renewed power of tax cuts may be the larger forces afoot in the economy. Trillions of dollars of surpluses are expected to flow in to a Beltway bureaucracy that is distrusted by Main Street and totally unfathomable to the Internet generation. Folks on Main Street and in the suburbs would rather use the money to help their kids. The kids, in turn, once they're old enough to turn in their skateboards for business plans, would rather see their tax dollars devoted to new technology start-ups. And almost everyone -- fully two-thirds of likely voters own stocks either directly or indirectly -- wants more after-tax income to invest in super-saver accounts that will help them reap the long-term benefits of the stock market.

Ownership, investment, and entrepreneurship fit the spirit of the times, and Bush has caught that spirit. The pundits who declared tax cuts a dead issue have been proved wrong. Tax cuts are again at the heart of the Republican presidential campaign -- right where they belong.

JWR contributor Lawrence Kudlow is chief economist for CNBC. He is the author of American Abundance: The New Economic & Moral Prosperity. Send your comments about his column by clicking here.


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©1999, Lawrence Kudlow