Bush's Tax Cut: From Slim Chance to Slam Dunk?

Now, a massive bipartisan deal that would even include rate cuts seems likely, thanks to the threat of recession

By Richard S. Dunham

Even before he's sworn in as President on Jan. 20, George W. Bush has won his first legislative battle. Six months after Vice-President Al Gore derided the Texan's $1.6 trillion tax cut as "a risky tax scheme" and a giveaway to the rich, Capitol Hill Democrats have all but conceded that Congress will send Bush a massive tax-relief package sometime in 2001. And some key provisions will probably be retroactive to January 1, 2001.

Just listen to House Minority Leader Richard A. Gephardt -- no friend of huge tax cuts. During a Jan. 3 appearance on NBC's Today Show, Gephardt said the final tax cut may end up bigger than Democrats suggested during the election year. Explained Gephardt: "It may be that it has to get bigger because the recession is looming, and we've got economic worries out there."

It's not much of a surprise that Democrats in general and liberals in particular would embrace Bush's reasoning that a tax cut could be useful in fighting off an economic slide. That's traditional Keynesian economics: Stimulate a bad economy by using the federal government to put cash in the pockets of workers.


  What's most surprising is that Democrats -- notably moderate New Democrat deficit hawks -- are starting to express willingness to consider an income tax rate cut, the most traditionally conservative piece of Bush's package. "We are for tax cuts," says California Representative Calvin M. Dooley, a centrist Democratic leader. "We expect rate cuts would be part of the final [tax] package."

Bush Press Secretary Ari Fleischer noted on Jan. 12 that a growing number of Democrats, among them maverick Senator Robert Torricelli of New Jersey, have endorsed rate cuts. That's a big change from the recent campaign mode, when many of these same Democrats warned that tax cuts -- and particularly rate cuts -- could drain the federal surplus and wreck the fiscal discipline of the Clinton years.

If Democrats are willing to accept some sort of rate cuts, the outlines of a final deal can be easily imagined. Its anchor would be relief from the marriage penalty tax. Everybody wants that. Also popular with all but the most liberal Democrats: a phase-out of the estate tax. Many Democrats seem willing to accept a rate cut in the lowest tax bracket from 15% to 10%. And Dems may well go along with House Majority Leader Dick Armey's proposal to speed up the tax cut by making it retroactive.


  But how to close the deal? Again, the outline is already there: Bush agrees to include some of Gore's targeted tax cuts for working families and in exchange, Democrats give the Republicans a win by allowing a small rate cut for the wealthiest taxpayers. Some Democrats are conceding that something like this could happen within the year. "Democrats will embrace some pretty sizable tax cuts," predicts Will Marshall, president of the Progressive Policy Institute, a centrist Democratic think tank. "But there's going to have to be some serious horse trading."

What a remarkable change in the political landscape. Without using a single penny of political capital, Bush has seen Democrats move halfway toward his $1.6 trillion wish list. If the new President exhibits any negotiating skill, he should win 80% or more of what he wants.

Bush shouldn't take too much credit for the situation, though. Economic circumstances -- more than GOP politicking -- have influenced the Democratic shift on tax cuts. But if he plays the politics right, he may well achieve a bipartisan tax-cut ceremony in the Rose Garden before the next football season kicks off.

Dunham is a White House correspondent for Business Week's Washington bureau. Follow his views twice a month in Washington Watch, only on BW Online

Edited by Douglas Harbrecht