When George W. Bush unveiled his "jobs and growth" plan on Jan. 7 in Chicago, he stunned his political opposition, Washington's cognoscenti, and many business execs in attendance--some of whom had to pinch themselves to make sure they weren't dreaming. The President, who only days ago was said to be struggling with a $300 billion proposal, unveiled a deficit-be-damned $674 billion, 10-year megapalooza of a plan. The aim: boosting the economy in the short term via accelerated cuts in marginal tax rates, and laying the groundwork for more robust growth over the long haul by eliminating individual taxes on dividends.
Although conservatives rejoice at the audacity of the proposal, not everyone is cheering. Democrats blast Bush's plan as a giveaway to the rich. "An irresponsible, ineffective, ideologically driven wish list," thundered Connecticut's Democratic Senator Joseph I. Lieberman. Big Business, while publicly supportive of the program, is privately concerned that there is little in it for corporations. Even within Bush's own party, there is fear among deficit hawks that the price tag is ruinous. "The people who have kept our economy going are middle-income Americans," asserts Senator John McCain (R-Ariz.), "not the investor class." He wants to scale back the dividend exclusion in favor of a more worker-friendly plan to trim payroll taxes.
With much of the package aimed at restoring investor confidence, conventional wisdom holds that Bush is taking a huge risk by pinning his hopes on this proposal. So why are his advisers so confident that the Democrats' fairness assault will fail? Political guru Karl Rove, who watched the Dems' populist attack over corporate wrongdoing fizzle in the midterm elections, is convinced that class-based appeals will not hurt a President who, unlike his father, has labored to avoid association with the country club elite. Moreover, with so many Dems seeking the Presidency, the opposition could have even more trouble than usual coalescing around an alternative.
But most important to the Bush high command and those close to the Administration is the conviction that Democrats are misreading the aspirations of the burgeoning investor class by railing against a plan so clearly aimed at investor interests. Some "70% of voters own stock," says Grover G. Norquist, president of the pro-tax-cut Americans for Tax Reform. "Bush recognizes that the investor class is the most important demographic group in the country." In the GOP view, it's Democrats who are running a risk in the Great Tax Debate by portraying investors as brandy-sipping, high-caste swells. That can alienate both suburban swing voters, who are sensitive to stock market lurches, and more passive investors, whose holdings are mainly in 401(k) plans--and, bust or no, still harbor hopes of striking it rich.
Some survey research supports the view that Bush has acquired Teflon in the old battle over income distribution. In pre-midterm polling by the Pew Research Center, investors favored GOP candidates by 48% to 43%. Today, a key factor driving Bush's 64% approval rating is a surge of support from suburban swing voters--the vast majority of whom invest in the market. "The White House has identified a new voting bloc that leans Republican," says pollster John Zogby. By harping on the benefits that will go to the wealthiest, "Democrats are talking to folks they have already got instead of appealing to the middle."
According to William F. Connelly Jr., a political scientist at Washington & Lee University, many Americans see themselves as part of a vast pluralistic swath of society that refuses to be polarized along class lines. "The Democrats' class-warfare pitch fails because most of us see ourselves as middle class," Connelly adds. "And the middle class is part of the investor class, along with the rich."
Democrats think it's disingenuous to label as "class warfare" the notion that the tax system should progressively hit the rich more than average workers. But the party's New Democrat wing cautions that by lapsing into traditional talk of income redistribution, Dems risk further estrangement from suburban voters.
Some Democrats hope to avoid this trap by blasting the cost of the Bush plan and the fact that it provides only a small jolt in 2003. "I do not believe the proposal will quickly or effectively boost the economy," says Senator John B. Breaux (D-La.), a leading party moderate.
As an alternative, Democrats envision a much smaller one-year stimulus plan. An approach pushed by House Minority Leader Nancy Pelosi (D-Calif.) provides tax rebates for the working poor, extends unemployment benefits, gives small-business-investment tax breaks, and sends emergency aid to states. Top Senate Finance Committee Democrat Max S. Baucus of Montana, meantime, wants to funnel $75 billion to help states with budget crises, and he couples that with middle-class breaks. But with the GOP controlling Congress, the Dems aren't optimistic about their chances. "The cards are stacked against us," laments Senator Barbara Boxer (D-Calif.).
None of which is to say the President's package will sail through unchanged. For starters, Bush will have to cut a deal with GOP lawmakers and governors, who see calamity in state finances unless Congress provides a bailout for soaring Medicaid budgets.
The most powerful force for change will likely be Big Business. Once again, it has seen a Bush tax plan launched with no direct benefit for corporations. Few execs dare to criticize the new proposal publicly; most praise it as a needed confidence-builder for an economy in the dumps. "We're interested in anything [Bush] can do to stimulate consumer and capital spending," says Wilbur L. Ross Jr., CEO of WL Ross & Co., a New York investment firm. "This is going to pump a lot of money into corporate treasuries and peoples' [pocketbooks]." Adds Raj L. Gupta, CEO of chemical giant Rohm & Haas Co. (ROH ): Bush is "proposing long-term fixes, not expedient fixes."
But while CEOs shower praise on the Bush initiative, their lobbying armies are quietly mobilizing. Particularly energized are reps for tech companies, real estate, and pension-fund management outfits. All have a common goal: cutting back on the total elimination of the dividend tax and redirecting tax benefits toward their industries. "We're going to make sure our issues get addressed," vows one tech lobbyist. "This will be changed by Congress."
In a surprise to many CEOs, the President declined to give new investment write-offs to big companies. Lobbyists for makers of capital goods argue that a broader incentive is needed to jump-start the tech and manufacturing sectors. Employee retirement-fund managers also fret about killing the dividend tax. The fear: Investors in retirement accounts who won't see the tax benefits for years might shift more money into taxable accounts. That's because dividends would be tax-free, and capital gains are taxed at a very low 20% rate.
Other skeptics include interest-rate-sensitive companies as well as state and local government officials who rely on tax-exempt bonds to finance projects. Because the dividend exclusion makes equities more attractive relative to debt, their financing costs will rise.
The bottom line is that a Bush plan that's rubber-stamped by the House will change in the more moderate Senate. "The winning formula might be the President's proposal," cautions incoming Senate Finance Committee Chairman Charles E. Grassley (R-Iowa). "Or it might be parts of proposals from some of my colleagues."
Still, a popular President whose party controls Congress will ultimately get most of what he wants, despite Big Business lobbying and liberals' class-based broadsides. But if Bush's gamble on growth doesn't pay off, the price could be high. Propelled by new tax cuts and a war with Iraq, the 2004 deficit could be $400 billion, or 4% of gross domestic product. That's a level not seen for a decade. Nowadays, Bush's horizons don't stretch quite that far--only to Nov. 2, 2004, and his rendezvous with the American voter.
By Lee Walczak, Howard Gleckman, and Rich Miller in Washington, Richard S. Dunham with the President in Chicago, and bureau reports