Bush's Tax Legacy

This WSJ editorial is a great example for why conservative fiscal policies are good for the economy and hence good for the poor.

Bush's Tax Legacy
January 6, 2007; Page A6 WSJ

In his op-ed column on these pages this week, President Bush made some news by underscoring his opposition to raising taxes. We were certainly glad to hear it, and to publish it, because by our lights the tax cuts and economic growth that has followed are his most notable domestic achievements (give or take a Supreme Court Justice).

That growth was underscored again with yesterday's buoyant jobs and income report for December. Job growth exceeding expectations at 167,000 and the jobless rate held at a very low 4.5%, despite a slowdown in manufacturing and construction. Since the Bush tax cuts on dividends and capital gains passed in mid-2003, the economy has created 7.2 million new jobs according to the survey of business establishments, and an additional 1.2 million in the more variable household survey.

Can Bush's Tax Cuts Survive?1As for the inevitable political complaints that these new jobs are all lousy, average hourly non-supervisory wages have now climbed 4.2% over the past 12 months, or twice the official rate of inflation. With flat or falling energy prices, and a tight labor market, real wages are also starting to show impressive gains.

Meanwhile, tax revenues continue to roll into the Treasury and state coffers. Federal receipts rose by 14.6% in fiscal 2005, another 11.8% in 2006, and kept rising by 9% in this year's first two months despite slower GDP growth. The budget deficit, in turn, has fallen by $165 billion in two years, and including state surpluses is now down to about 1% of GDP, which as an economic matter is negligible. Tax revenues as a share of the economy are also back above 18.5%, which is their modern historical norm.

This record is so impressive that liberal critics have been forced to ignore it and focus on other alleged outrages, such as "inequality," or CEO pay, or some vague prediction of future doom. And, yes, the future is unpredictable. But in the field of economics there are few more definitive tests than the results from the tax cuts of 2003. Critics predicted disaster, supporters the opposite, and the supporters can point to more than three years of prosperity as vindication -- despite $70 oil and $3 gasoline, and lately despite the worst housing slowdown in 15 years.

However, those lower tax rates are set to expire at the end of 2010, and the Democrats who now control Congress want them repealed. The "pay-as-you-go" rules that the House just passed would make their extension all but impossible. What this means is that if Congress merely fails to act, the tax cuts expire and the economy will be hit with one of the largest tax increases in history in 2010.

The dividend rate would snap back to 39.6% from 15%, the capital gains rate to 20% from 15%, and the top marginal income tax rate to 39.6% from 35%. Marginal and average tax rates for the middle class would also increase, returning to the Clinton-era levies that had driven taxes as a share of GDP to a postwar high of 20.9%.

Now in the minority on Capitol Hill, Republicans can't do much about this. But it certainly poses a dilemma for Democrats -- all the more so because they must also cope with the rising burden of the Alternative Minimum Tax. The AMT -- created by Democrats in 1969 to capture a few millionaires -- will engulf some 23 million taxpayers this year without a change in law.

This week, the new Democratic Chairman of the Senate Finance Committee, Montana's Max Baucus, called the AMT a "monster in the tax code" and introduced a bill to repeal it. The only catch: Under Congress's wacky "static revenue" analysis of calculating the impact of tax cuts, AMT repeal would "cost" the Treasury as much as $1.2 trillion over 10 years. Maybe they can find that much in Congressman William Jefferson's freezer.

Our guess is that Democrats will try to finesse all this in the near term. With President Bush now saying he'll oppose a tax increase, they'll be wary of voting for one that would be vetoed and provide Republicans with an issue in 2008. So perhaps they'll try a one- or two-year AMT fix to get them past 2008, while waiting for their Presidential nominee to advance a more detailed tax proposal. Most likely, that would involve a pledge to keep the lower Bush rates for the "middle class," while raising rates on "the rich."

Bill Clinton played that tune all the way to the Oval Office, only to raise taxes on everybody once he got there. It'll be fascinating to see if voters give his wife, Senator Hillary Rodham Clinton, the same leave if she's the Democratic nominee. In any event, what we seem headed for is a two-year national donnybrook over taxes and income that will be decided by the voters in November 2008