By Joseph Weber
If President George W. Bush put his new economic stimulus program to a vote among some 2,000 Chicago business leaders who heard him speak on Jan. 7, his bold plan would win hands-down. The question now is whether the rest of the country will be quite so enthusiastic.
Bush proposed $670 billion worth of tax cuts over the coming decade for small businesses, investors, and taxpayers from the top to the bottom of the economic ladder. The crowd at the Economic Club of Chicago interrupted Bush's 21-minute luncheon speech no less than 28 times to applaud measures aimed at jolting the economy out of its doldrums. The only complaint: Some executives said afterward they had hoped to see more.
How the President's plans will play outside the corporate crowd is far less clear, however. The tax-cut plan is sure to worry deficit-wary conservatives, who are already fretting about how the U.S. will pay the bill for an additional $98 billion tax cut on top of the war on terrorism and, perhaps, a war against Iraq. Bush is also sure to face class-warfare attacks from Democrats, who will focus on some big benefits for the wealthy, such as elimination of taxation on dividends (see BW Online, 1/7/03, "Who Gains from a Dividend Tax Cut").
Bush's biggest applause-getters, however, were his plans for small businesses and the modest-income Americans who often work for them. One proposal would let small-business owners write off $75,000 worth of equipment purchases annually, instead of just $25,000 under current law. "I really appreciate the small-business focus," said banker M. Hill Hammock, chief operating officer of ABN AMRO North America. "If you are looking at job-creation, that's where the jobs will be created."
Indeed, some small-business managers figure that the new write-off might be just the spur they need to jump-start their capital purchases. For Craig Sieben, owner and operator of Chicago energy-management services outfit Sieben Energy Associates, that break could mean new computer equipment for his 15 employees. "It would make me look afresh at making more significant investments in equipment," says Sieben. "That would increase my employee productivity."
Beyond the appeal to mom and pop, Bush preached that old-time GOP religion of less taxes and regulation. At times, Bush's lines sounded quite Reaganesque -- and the Windy City crowd ate them up. One example: "The role of government is not to manage or control the economy from Washington, D.C., but to remove obstacles standing in the way of faster economic growth."
Another: "Many jobs are lost in America because government imposes unreasonable regulations, and many jobs are lost because the lawsuit culture of this country imposes unreasonable costs." And a third: "Our first challenge is to allow Americans to keep more of their money so they can spend and save and invest."
Top executives from Allstate Insurance, Kraft Foods, Tellabs, Baxter, Illinois Tool Works, SBC Communications, and Abbott Laboratories shared the dais with Bush at the Sheraton Chicago. Some expressed private concerns that he didn't offer more direct benefits to Big Business -- the President offered no proposals for investment tax credits, for example, or for other measures to stimulate capital spending. But critics were few and fairly muted. Big Business will win, at least indirectly, if the elimination of taxes on corporate dividends boosts stock prices, observed Harry M. Jansen Kraemer Jr., CEO of biotech and health-care outfit Baxter International.
WHAT'S IN IT FOR TECH?
It's perhaps telling that Bush chose Old Industry-dominated Chicago, instead of Silicon Valley, to launch his economic platform. While a boon for mainline blue chips and their investors, Bush's plan to abolish dividend taxes will be of virtually no immediate help to high technology, the economy's major growth sector. Tech outfits typically don't pay dividends and would glean no gain. And odds are that most such businesses -- which attract growth-minded investors -- wouldn't find any reason in the new plan to consider paying out their cash in dividends. "I doubt that kind of thing would tip the scales," says Michael J. Birck, chairman of Tellabs, a telecom in Naperville, Ill.
Still, plenty of high-tech executives wouldn't mind if a dividend tax cut returned $20 billion to the pockets of American investors. Whether the move helps corporations or not, it makes sense to John A. Edwardson, CEO of CDW Computer Centers. "I don't know if ending dividend taxes will spur investment as much as it will spur spending by consumers," says the corporate chief. As consumers benefit, he adds, "that will flow back into the economy."
The plan outlined by the President is a bold one. He wants to take all the tax-rate reductions that were to have been phased in through 2006 and compress them into 2003. The efforts would include ordering the Treasury Dept. to immediately adjust withholding of income taxes to let each American keep more in his or her paycheck.
By giving back an average of $1,083 to some 92 million taxpayers this year, Bush hopes to spur spending. He would also reduce the so-called marriage penalty now, instead of waiting until 2009, and would raise the child tax credit from $600 to $1,000 this year, rather than in 2010. Bush won resounding applause when he said, "The time to deliver the tax rate reductions is now, when they can do the most good for American businesses."
The President must sell his plan to a Congress controlled by his own party. But Democrat William Daley, president of SBC Communications, former Secretary of Commerce under President Bill Clinton and Al Gore's 2000 Presidential campaign manager, was respectfully skeptical. "The test will be to see if it moves the economy," says Daley, who joined his brother, Chicago Mayor Richard M. Daley, on the dais with Bush.
Daley cautioned that speed will be needed, noting that the plan may not move as fast on Capitol Hill as Bush would like. "This is just the beginning of the negotiations," he says. "I just hope it doesn't drag on in Congress."
THE BIG SELL.
It's not just Democrats who will call for changes as the legislation makes its way through Congress. Already, some conservative economists are questioning the President's timing. The dividend tax cut, for instance, is a good idea but probably ill-timed when war spending and deficits loom, says Gerald J. Lynch, a professor of economics and associate dean at Purdue University's Krannert School of Management. Says Lynch: "I'm a conservative economist who is skeptical about the strategy."
The setting for Bush's speech was right out of the playbook chief political strategist Karl Rove. The audience couldn't have been more appreciative. Now comes the tough part. Bush must persuade the American people that pushing the nation further into deficit spending is a recipe for prosperity -- not a reckless gamble.
With Roger Crockett in Chicago
Weber is BusinessWeek's Chicago bureau chief
Edited by Douglas Harbrecht