Online Extra: A Chat with Bush's Budget Czar

Now is the time to reform Social Security, says OMB Director Josh Bolten. And he sees Bush working toward tax changes in a second term

As Director of the White House Office of Management & Budget, Joshua B. Bolten has a close working relationship with President George W. Bush that dates back to the 2000 Presidential campaign. He's an outspoken supporter of Social Security and tax reform and is expected to emerge as a premier economic policymaker if Bush wins a second term (for more, see BW Online's Election 2004 coverage).

Bolten sat down on Aug. 24 with BusinessWeek Correspondents Howard Gleckman, Paul Magnusson, and Rich Miller to discuss the President's policies. Here are edited excerpts of their conversation:

Q: President Bush has talked about wanting to create an Ownership Society. What does that mean?


The President's philosophy is that it is government's job to empower people to make choices, to promote ownership, to promote the freedom that comes with financial independence. It runs through a large proportion of the President's domestic agenda.

You see it in housing policies that are designed to promote ownership. You see it in [certain] health-care proposals -- the notion of letting people save for themselves in a health savings account so they don't have to rely on their employers as much for their security and health care. You also see it in his proposal for personal retirement accounts using money from Social Security.

Q: Is there anything to all the talk about the President pushing for tax reform if he wins another term?


The President has always been interested in making the code simpler and fairer. His first priority when he came into office was to see that growth was restored. He accomplished that largely through the tax cuts. To some degree, the changes [already] have made the code simpler and fairer.

We've taken 5 million people off the rolls entirely. Rates are lower. Elimination of the death tax is a huge simplification. I think the President would like to push it in that direction. Exactly how far, when, and how remains to be seen.

Q: Some people see the President's tax initiatives on savings -- retirement savings accounts and lifetime savings accounts -- as moving away from taxing income and toward taxing consumption. Do you agree?


Yes, and they are good ideas in and of themselves. They are very much at the center of an ownership agenda. They promote individual savings.

Q: Would the President still like to see the elimination of taxes on dividends?


The President would like to see the impediments to savings and investment as low as possible. His proposal to bring the dividend tax down to zero was one of those elements. Now we ended up with something that was pretty smart and important. We brought dividend and capital gains taxes down to the same level.

That equalizes those areas for businesses. You don't want businesses making their decisions based on the tax code. You want them making their business decisions based on what's best for their business.

Q: Some business leaders want the bonus depreciation tax break that expires at the end of this year extended. Does the Administration favor that?


No. We haven't proposed it. The bonus depreciation for all businesses was intended in large part as a stimulus to the economy. If you make it permanent, you diminish its stimulus effect. What we were trying to do was bring forward investment to pull the economy out of its slump.

You have to give that and the rest of the tax-cut provisions a lot of credit for preventing a recessionary spiral. They've put the economy in a situation where we're well poised for strong and stable growth for years to come.

Q: Are you worried that there will be a big slump in corporate investment next year after the bonus depreciation rules expire?


Our economists think the economy is very well positioned now for strong growth, and the prospects for investment are very strong. Our economists aren't concerned about a dramatic falloff in investment.

Q: After the Social Security Commission issued its report in 2001, interest in the issue seemed to die, what do you see as the next step?


This is an issue that will require Presidential leadership. The President has led by putting the debate into play, by announcing that he favors personal retirement accounts as part of a long-term solution, and by saying there is a problem.

It's a very serious problem. It's not that hard to solve. But it will require some political courage. There is going to have to be -- and there will be -- Presidential leadership. I'm hopeful [the issue] will rise back up in a second Bush term.

Q: Does the President have to make a specific proposal at some point?


At some point yes. But I would be among those urging the President to make sure that people understand the problem, and that that understanding is sufficient so that those who are proposing solutions cannot easily be demagogued. I would encourage the President to make sure all that groundwork is laid before [he puts] a proposal on the table. You want a specific proposal on the table when you are actually ready to take it up and move it before the Congress, not before.

There will be some debate in the campaign because the Kerry campaign says there really isn't a problem, and if there is one it can be solved with modest increase in taxes on the rich. I think that's demonstrably wrong.

Q: How daunting a challenge is the $1 trillion-plus transition cost?


It shouldn't really be viewed as new spending. It's taking obligations that the government must pay 30 or 40 years from now and basically bringing them forward, giving people their money now instead.

It's important that at the time we undertake that, we not be in a difficult deficit situation. The President has in place very solid plans to bring the deficit down substantially over the next five years. We will do better than [that], and the numbers look good for five years beyond that as well. Where the numbers turn bad is beyond 10 years out. That's when the entitlement tidal wave hits.

You cannot address that problem through any other means than entitlement reform. Now is the time to reform Social Security.

Q: People say the real problem is not Social Security but Medicare and Medicaid. Do you agree?


Social Security is not small, but Medicare and Medicaid combined are bigger. The President has already put in place some policies that will make it possible to address those problems. The Medicare bill will make it possible to bring Medicare costs under control without sacrificing quality. Those elements are the Health Savings Accounts and the introduction of private competition into the Medicare system.

In addition, the President has put forward some good policies to promote the adoption of advanced information technology for the medical profession. We can and will push those even farther.

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