Tax cuts sure to be a hot-button election issue

Author: Jim Zarroli

Published: January 15, 2004

MELISSA BLOCK, host: When President Bush campaigned in 2000, promising to cut taxes, some experts doubted he could follow through right away. In fact, the president made tax cuts the centerpiece of his economic agenda. He pushed through several reductions, even in the face of war and rising deficits. To the president's defenders, the recent economic rebound is vindication. But the cuts have also left the country with big long-term fiscal challenges that his Democratic opponents are trying to make a hot-button issue. NPR's Jim Zarroli reports.

JIM ZARROLI reporting: President Bush's father famously angered his Republican base when he broke his no-new-taxes pledge, but the president himself has a tax-cutting record second to none. On his watch, there have already been cuts in dividend taxes, estate and capital gains taxes and in marginal income tax rates. The cuts were controversial, and with the election approaching, they remain so. William Gale is a senior fellow at The Brookings Institution.

Mr. WILLIAM GALE (Senior Fellow, The Brookings Institution): The two trademark policies of the Bush administration are the military intervention in Iraq and the big push for tax policies. If the campaign is actually a referendum on the Bush administration, tax cuts will be front and center.

ZARROLI: These days, even some of the president's harshest critics concede that the tax cuts have had a positive effect. The US economy grew by a dazzling 8.2 percent during the third quarter of last year, and economists generally agree that was to some extent due to last summer's tax cuts which led to more consumer spending. And proponents say the cuts will keep the economy growing in the years to come by stimulating investment, as President Bush argued in his weekly radio address last Saturday.

President GEORGE W. BUSH: The choice is clear. Tax relief has got this economy going again. And tax relief will keep it moving forward.

ZARROLI: But some critics question whether the recent economic surge is anything more than a short-term jolt, and they say the cuts would have been even more effective if they were aimed primarily at lower-income people who are more likely to spend whatever money they have. Rudolph Penner, former director of the Congressional Budget Office, says the cuts also come at a big fiscal cost.

Mr. RUDOLPH PENNER (Former Director, Congressional Budget Office): The president can rightly claim that the tax cut played a positive role in the short run. Of course, the problem is that they're long-run tax cuts, and they put us in a bit of a hole in the longer run by increasing the budget deficit.

ZARROLI: And Penner says over time, that reduces the amount of savings available to the economy and hurts growth, especially with a projected Social Security shortfall. For its part, the Bush administration says that the deficit, which is projected to be $480 billion this year, is a temporary byproduct of the economic slowdown and the costs of homeland security and the Iraq war and is, at any rate, not excessive in historical terms as a percentage of the total economy. But to many Democrats, the growing deficit proves the recklessness of the Bush tax cuts. And in an ironic turn of events, it is Democrats like former Governor Howard Dean who now seem to talk the most about fiscal discipline.

Dr. HOWARD DEAN (Former Governor, Vermont; Democratic Presidential Candidate): The fact is, we got to balance the budget. We cannot keep telling people we're going to give them all the programs they want and then there's not going to be any sacrifice of any kind.

ZARROLI: Dean wants to repeal all of the Bush tax cuts, even those aimed at the middle class. He has said he would substitute other tax reforms later. Most of the other candidates, like Senator John Edwards, want to do away with the Bush cuts, but spare those aimed at the middle class. Some, like Senators Joseph Lieberman and John Kerry, say arguing for a total repeal would destroy the party's chances in November. Former CBO head Rudolph Penner says it's not clear how much of an issue the deficit really is for voters at a time when the economy seems to be improving.

Mr. PENNER: The real problem, I think, is that responsibility doesn't seem to sell to the electorate, and the electorate has its eye on the short run, and the short run is going to look very good.

ZARROLI: But some Democrats argue that voters will accept repeal if they understand they're getting something in return. Congressman Richard Gephardt proposes repealing all the Bush cuts and offering comprehensive health care instead. Still others, like Congressman Dennis Kucinich, are arguing for an extensive tax code reform. General Wesley Clark would exempt families earning less than $50,000 a year from paying income tax. Clark argues for simplifying the byzantine tax code with its countless loopholes and exemptions. Economist Allen Sinai says that would be a good thing for the economy.

Mr. ALLEN SINAI (Economist): In and of itself, it is a worthy goal of tax reform. Then the next question is: What is the program for simplifying the tax code? And if revenues are lost, how would one replace those revenues?

ZARROLI: In fact, anyone elected president next November will be hobbled by fiscal realities which will greatly limit their budget options. And Democrats have another problem. The last time a Democratic president took on the tax code was a decade ago when Bill Clinton faced massive opposition, and his party lost control of Congress in the next election. This time, with Congress still in Republican hands, any new Democratic president would find repealing tax cuts an even more formidable task. Jim Zarroli, NPR News.