Commentary: Tax Cuts: Where's The Old Magic?

In case you just tuned in to Campaign 2000, there is nothing wrong with your TV set. Yes, that is John McCain, a stiff-backed conservative in the Goldwater tradition, blasting George W. Bush for backing "risky" tax cuts that threaten Social Security. And yes, that's Bush returning fire, charging McCain with failing to help low income taxpayers.

Officially, the Y2K race kicks off on Jan. 24 with an icy blast from Iowa's caucuses. And if the contest is noted for anything so far, it may well be these La Nina-like shifts in the political winds.

How come? Once again, it's the economy, stupid: The GOP's altered dialogue is the direct consequence of the triumph of surplus-generating Clintonomics and nine years of a boom economy. Republicans can no longer cast their tax plans in the traditional way, as a recipe for boosting anemic growth. Instead, they bill their tax proposals this season as structural reforms meant to generate more income for those bypassed by boom-time prosperity. "You're watching a party struggling to find a new language for unprecedented prosperity," says Marshall Wittman, a Heritage Foundation analyst. "No one has succeeded yet."

Among the new debates:

The surplus vs. supply side. On Jan. 26, the Congressional Budget Office is expected to forecast that if spending can be controlled, the 10-year surplus will hit $2 trillion. That's double the estimate of a year ago. In addition, the CBO says a New Economy surge could boost average growth to nearly 2.8%, up from 2.3%.

In theory, Republicans believe every dollar left in Washington will be wasted, so their natural impulse is to call for an immediate return of the bounty to citizens. Not this time: Republicans only back a partial rebate. Why? They're mindful of Bill Clinton's and Alan Greenspan's caution that unless a sizable chunk of the surplus is saved to pay down the national debt, there won't be a cushion for the Baby Boomer retirement wave. Of course, each Republican has his own approach to save Social Security: McCain sets aside an astonishing two-thirds of future surpluses for that purpose, publisher Steve Forbes calls for total privatization, and Bush promises to fight hard in his first year for a thus-far unspecified plan to fix the system.

Bigger may not be better. Since the Reagan era, Republicans believed the candidate with the boldest tax-rate cuts has the best chance to win voters' hearts. But this time, only former Vice-President Dan Quayle---an early Y2K casualty--and flat-taxer Forbes have called for Reagan-sized across-the-board cuts. And clearly, megatax cutters have gone nowhere at the polls.

At the moment, GOP primary voters are mainly pondering Bush's $1.3 trillion, 10-year plan vs. McCain's $497 billion proposal. Neither is considered particularly Reaganesque by supply-siders, who grouse that cost worries led Bush to forgo across-the-board tax cuts and a trim in the capital-gains tax rate. But according to a new study by supply-side economist Bruce R. Bartlett, the stock-market wealth effect has made Americans feel richer than statistics indicate, snuffing out sentiment for tax relief.

Out of the money. Instead of dreaming up new incentives for business investment--a traditional pastime of the GOP--Bush and McCain are in a contest to show empathy for low- and moderate-income Americans. Bush would do it by cutting the bottom 15% bracket to 10%, while McCain would cut rates from 28% to 15% for families earning $43,050 to $70,000 per year.

The Texan charges that McCain ignores the working poor, who could not take advantage of his rate cut. The Arizonan fires back that Bush is giving 36.9% of his tax breaks to people making more than $319,000 a year. That's a point Democrat Al Gore would happily make as well. Says Stephen Moore, fiscal policy director of the libertarian Cato Institute: "Republicans are genuflecting on the whole class-warfare argument."

Don't be surprised to see even more GOP contortions in the general election. Once the party's conservative-dominated primaries are over and more mainstream voters enter the picture, today's tax debates could be just a memory. They'll be replaced with arguments over schools, health care, and Social Security. These concerns seem much more central to voters in prosperous times--the new political reality Republicans are just beginning to recognize.

Before it's here, it's on the Bloomberg Terminal.