As the Republican Party begins its convention in New York City, the Bush Administration is busy shaping the domestic economic policy package it will take to voters in November. President George W. Bush is likely to offer a vision of an Ownership Society in contrast to the "middle-class squeeze" message by Democrat John F. Kerry. Campaign advisers are proposing a variety of plans for Bush to include in that vision. Here is our take on several key GOP economic ideas. It favors pragmatic solutions over political partisanship and centrist positions over extreme ideology.
HEALTH. The rising cost of health care is perhaps the most pressing issue in America today. Sky-high medical costs are slowing job growth, blind-siding the retired, and overwhelming families everywhere. One campaign proposal to expand existing Health Savings Accounts is a good idea that President Bush is planning to roll out. HSAs allow people to contribute money to a tax-free account that can be used for out-of-pocket health-care expenses if they buy high-deductible health insurance policies to cover catastrophic expenses. The new idea from the Bush campaign is to let people deduct the cost of the premiums they pay to buy such policies. HSAs can reduce insurance reimbursement costs to doctors because patients pay them directly. And by also paying for drugs and lab tests, people are more likely to shop around for generics and lower-cost labs. HSAs are a winner for Bush.
SOCIAL SECURITY. But pushing private Social Security retirement accounts is not. Advocates in the campaign want to permit employees to put 2 percentage points of the 12.4% Social Security payroll tax into private accounts. Yet unlike the health system, Social Security isn't broken. Forecasts of its demise are based on unrealistically low economic growth estimates. As these are raised year after year, the eventual bankruptcy of the Social Security trust fund gets pushed further and further back. The Congressional Budget Office now estimates it will hit empty in 2052, long after most boomers are dead. Even that is based on low estimates of productivity and growth. If current levels are sustained, Social Security could be available for the boomers and their kids. The drive to do away with this safety net is based on ideology, not economics.
TAXES. The campaign priority is to continue the march toward a tax code that exempts savings and investments while reducing taxes on income. The first goal is to make permanent Bush's 2001 and 2003 cuts on income, capital gains, dividend and estate taxes. The second is to offer additional new Retirement and Lifetime Savings Accounts. But rising budget deficits make this problematic. Just keeping tax rates essentially where they are now and paying for the new Medicare drug benefit and fixing the alternative minimum tax (AMT) will add nearly $3 trillion to the existing budget deficit.
To pay for this, some in the Republican Party are suggesting a radical shift of the tax code to either a flat tax or a retail sales tax levy. The country isn't nearly ready for this kind of radical change. Better for Bush to make some hard choices among his tax initiatives. Maintaining the capital gains and dividend taxes at 15% are clear pro-savings, pro-investment, and pro-growth policies. But eliminating all estate taxes is excessive and expensive. Allowing individuals, businesses, and farmers to retain up to $5 million in their estates and dropping the top rate to 30% from 55% makes the estate tax fairer and saves money. And since the income tax cuts aren't scheduled to expire until 2008, taxpayers will benefit over the next four years without any action. This preserves some fiscal flexibility to deal with a possible budget deficit crisis in the future.
SPENDING. There are crosscurrents within the Bush campaign about curbing government spending, and the President would do well to take note. Cutting multi-billion-dollar farm subsidies makes both fiscal and economic sense. Revamping the ill-advised Medicare drug benefit could save more billions. And tackling such egregious pork barrel projects as the highway bill could free up big sums to help pay for more important pro-growth tax cuts.
Bush's vision of an Ownership Society could have broad appeal to voters. It offers them a sharp contrast with Kerry's own vision of government help for an overburdened middle class. But most Americans will insist that either vision be fair, equitable, and practical before they buy into it. That's the campaign challenge for President Bush when he steps to the podium on Thursday to ask for a second term.