President Bush’s Tax Cut Plan
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GWEN IFILL: For more on the tax cut debate, we’re joined by four people who write frequently about economic issues: Robert Bartley, editor of The Wall Street Journal; Virginia Postrel, editor-at-large of Reason magazine and a contributing columnist to The New York Times; Kathleen Madigan, a columnist at Business Week magazine; and Jeff Madrick, editor of Challenge magazine, an economics journal. He is also another contributing columnist to The New York Times.
Mr. Bartley, $1,600 tax cut, $1.6 trillion cost. Is this a good or a bad idea?
ROBERT BARTLEY: Well it’s certainly a good idea to cut taxes right now. We’ve got taxes collecting a greater percentage of the economy than at any time since World War II. We’ve got government surpluses. We’ve got an economic downturn. If we don’t cut taxes now, I can’t imagine when we might ever do so.
GWEN IFILL: How about the size of this tax cut?
ROBERT BARTLEY: Well, I’m not big on trying to guess what things are going to cost over ten years. I think that’s kind of an artificial exercise that is mostly designed to keep the government from cutting taxes. I think the need for a tax cut is right here and now and I don’t see anything wrong with Bush’s plan. I see that Congressman Jeff Flake is going to introduce a bill to make the tax cut bigger. I think that makes more sense than trying to make it smaller.
GWEN IFILL: Mr. Madrick, is this a big cut tax cut? Too big, too small? Is it even the time?
JEFF MADRICK: I think it’s too big. Now, I’m concerned about recession. I indeed think there are a lot of potential problems out there. Consumers have a lot of debt. That high US dollar is a real wild card that could make it difficult to pump up the economy because if the dollar falls, we’ll get inflation. So I am concerned. I think we do need some stimulus, but do we need more than a couple of hundred billion dollars of stimulus and should it be for the next ten years ad infinitum, which could jeopardize the surplus and indeed keep us from paying for some of the things we need down the road? No. The answer is no. So I’m for some kind of tax cut. I think there’s a pretty interesting proposal offered by Richard Freeman of the National Bureau of Economic Research and Eileen Applebaum of the Economic Policy Institute, a kind of dividend to the American people. Give them some money. Let’s keep the recession from getting bad or maybe even stalling, but not lock us into a ten-year tax cut that could jeopardize our fiscal situation and keep us from spending on the things we need down the road.
GWEN IFILL: Virginia Postrel, what do you think about that last suggestion, also, what about this notion that a tax cut is what is needed to pull the country out of an imminent recession?
VIRGINIA POSTREL: Well, I think we’re primarily looking at long-term effects. There’s considerable empirical, historical evidence that giving people a rebate or some kind of short-term quickie Keynesian fix won’t work to pull out of a recession — that monetary policy at the federal reserve is far more important. In terms… what we’re really looking at here is long-term economic growth. Giving people incentives to work, to save, to invest, to take risks by lowering their marginal tax rates and also removing the incentive that the federal government has to spend what it has. I mean we’ve got… this surplus is burning a hole in the Congress’s pocket like it’s like a five-year-old with their first dollar.
GWEN IFILL: Kathleen Madigan, what about that? Is this money that was going to go the way of all flesh if left in Congress’s hands or is this the kind of money that should be given back to American people?
KATHLEEN MADIGAN: I have to agree that once you open up this like Pandora Box, there are… Congress is likely to spend the surplus rather than give a tax cut. Given a choice, I think we should perhaps increase spending in some targeted areas such as education. But the better way would be to pay down the debt and to give a small tax cut.
GWEN IFILL: Well, assume for a moment that this is the option which George Bush has presented today which is a 1.6 trillion — some people say it could even go higher, you heard Mr. Bartley allude to — dollar tax cut. Is that the right way for us to go at this point in history?
KATHLEEN MADIGAN: My problem with this… talking about the tax cut, is that it’s not going to help the economy here and now. I mean, Larry Lindsey has said that the soonest they hoped to get this into the economy is the third quarter. It’s only February and the economy needs help now. I’m not in the camp that thinks we’re in a recession. I think the first quarter is extremely weak, but for two special reasons: Manufacturing is in a recession — that sector alone — because they have an inventory overhang. And then we have the energy problems in California, which is also going to subtract from growth this quarter. But I don’t see where a tax cut or extra money in the second half of this year is going to help us right now.
JEFF MADRICK: Gwen, can I interrupt on that.
GWEN IFILL: Please.
JEFF MADRICK: The point I think is that if we have a modest stimulus of some kind, none of us is good enough to tell you whether there will be a recession or not. The sort of sanguine attitude that we can pull right out of this I find a little bit surprising. I can’t tell you either. But I know there are risks out there. A modest tax… a modest stimulus in the form of some kind of give-back makes entirely good sense not because we need it right now, though we can do some kinds of things to stimulate the economy right now, but we can forestall a problem down the road. Now is monetary policy sufficient for that? We simply don’t know. No economist seriously knows that — especially in a downturn. If confidence is declining ahead of interest rates falling, you’re going to get a downturn no matter what Alan Greenspan does. It will be very difficult to turn around.
GWEN IFILL: Mr. Bartley, you’re trying to get in?
ROBERT BARTLEY: It’s kind of late for either monetary policy or fiscal policy to effect the first quarter. In terms of counter cyclical action against a recession, the time to cut taxes was back last year when everybody was saying we’d overheat the economy. I mean, we got the situation to cut taxes right now, we ought to do it right now.
GWEN IFILL: Virginia Postrel, last year and even this year when George W. Bush talked about cutting taxes, at least this large a tax cut; until a short time ago it was considered dead on arrival. Is this something which is new a kind of empathy, excitement about tax cuts about the economics of the situation or about the politics of it?
VIRGINIA POSTREL: Well I think it’s a little of both. First of all any time the economy starts to slow, politicians in Washington feel that they need to do something, otherwise they will be blamed or, you know, because they like to take credit when things are good. We can agree or disagree about how much effect they actually have. But they want to do something and a tax cut is on the agenda. A tax cut is popular — especially a tax cut as President Bush keeps saying where every single taxpayer knows they will get something. In the past administration, tax cuts have always been iffy. You didn’t know for sure whether you were going to be in the qualifying category to get one or even whether it would be… whether it would be passed. So that’s looking good. And then the other thing is, of course, the Congressional Budget Office came in with projections for even larger surpluses than were anticipated before, and that makes this notion of giving back some of this overcharge even more popular. I mean, this is like if you hire a contractor to remodel your bathroom and he gives a bid for, I don’t know, $7,500 and it comes in at $6,500, he doesn’t get to keep that $1,000 — you get it. That argument is out there.
JEFF MADRICK: It’s certainly not an overcharge at all. Many people argue, as Virginia well knows, that because we raised taxes early on, we were able to get the federal budget in order and help relieve stress in the capital markets…
VIRGINIA POSTREL: The fact that overcharge… has nothing to do with where it came from. The fact that it’s an overcharge is simply a matter of mathematics. As I say, if someone gives you an estimate, a good-faith estimate that something is going to cost $1,000 more than it ends up costing, it’s still an overcharge. He still returns it to you.
GWEN IFILL: Let me step in.
JEFF MADRICK: I think that’s just….
GWEN IFILL: Let me step in and bring Kathleen Madigan back into this. It’s a zero sum game. There is only so much money no matter what we agree on, what these incredible projections are. What doesn’t get done if tax cuts get done?
KATHLEEN MADIGAN: I want to make a point that four years ago the CBO was actually projecting ever greater deficits over the ten-year span. So to put a lot of faith into these ten-year plans, you know, you have to take them with a large grain of salt. But I think you’re right that there is some worry that some fundamental problems may not be taken care of. I think the Bush administration should decide what the federal government should do for people and, you know, I do think he’s stepping in the right direction with education. In the long run, investing in human capital is healthy for the economy. And it’s more productive.
GWEN IFILL: What about Social Security and Medicare?
KATHLEEN MADIGAN: Well, you know, they’re still saying that that’s going to be off the table. That when they talk about the $4.6 trillion surplus total and then they cut away what they expect for Social Security and sometimes they cut away what they expect for Medicare, that goes either way, and then they still say they have enough for this large tax cut and some increase in spending. As I said before the problem is what will the final tax bill look like once Congress gets their hands into it?
GWEN IFILL: Which goes right to my next point, Robert Bartley. Ten years ago you well remember Ronald Reagan sent a tax cut bill to Capitol Hill. And by the time it left Capitol Hill, it was double in size, one of the largest tax cuts in history. How do you stop the Christmas tree effect where people keep loading on? You heard the president talk about that today.
ROBERT BARTLEY: The president said he would stop it.
GWEN IFILL: How?
ROBERT BARTLEY: I think that one thing we have to keep in mind here when you said a minute ago there’s only so much money, well there’s some sense in what, you know, trees don’t grow to the sky. But the question is how much money? And if you can get a tax cut that’s going to promote economic growth, which I think you can do by cutting the marginal rates, which affect the incentives in the economy, then there’s going to be more money in the total economy and there will probably be more money in federal revenues or at least a lot more than is projected — that’s been our experience. So I think that cutting taxes is a good investment in future growth that all of these other things, particularly Social Security, depend upon.
GWEN IFILL: Missing, Virginia Postrel, from this formula today at least proposals so far today: capital gains tax cuts, certain kinds of corporate tax cuts which had already been approved by previous Congresses. Will this proposal survive without those things attached?
VIRGINIA POSTREL: That’s a very good question. I think that raises this Christmas tree problem. I think one… I don’t know, but I suspect that one reason for leaving those things out is to try to discourage corporate lobbying to add lots of loopholes and to really concentrate on cutting rates for individuals and perhaps simplifying a little bit and make the focus on individual taxation rather than corporate taxation. I mean, I personally would like to see them simplify some of the ridiculously complex capital gains tax schedules that were passed in some previous tax bills, but I would rather that they keep the bills simple and focused on individuals’ income taxes partly for political economy reasons because it makes it easier to screen out this larding on of loopholes.
GWEN IFILL: Let’s talk about political economy, Jeff Madrick, for a moment. Is it even safe anymore to argue in favor of spending on education, whether it’s Social Security, Medicare, on anything when tax cuts for individuals is a much more palatable alternative?
JEFF MADRICK: Well, I don’t know about the pragmatics of it. I know not many people of influence and articulateness have tried on the national scene in recent years. I think we really have to try to understand, Gwen, what this debate is about. We can talk about creating incentives for economic growth, but really this is a debate about the uses of government. A big tax cut now down the road means chopping off at least a couple of the toes of government. The question the American people have to think about I think a little more is how do we want to use government? Do we want to… it’s very difficult to raise taxes again once you’ve cut them. We tend in America only to have had very significant tax increases in times of war. When war was over, we used that tax revenue even as far back as the War of 1812 to build roads and general improvements, gradually taxes were cut after that. When you make a tax cut of any size, even to help the poor — and I think this is a very lopsided tax cut, to say it’s going to all individuals I think is missing the point…
VIRGINIA POSTREL: It’s going to all taxpayers. It’s not going to people who don’t pay taxes.
JEFF MADRICK: For the poor, you have to keep in mind that down the road when the government should be doing some public investment and public investment has been cut way back in education, in infrastructure, we do very little about day care and yet the big social revolution of the last 25 years has been the two-worker family and the working mother with social revolution. We don’t create those institutions. We’ll need some money down the road.
GWEN IFILL: Pardon me. Kathleen Madigan, who wins and who loses in the end with this plan?
KATHLEEN MADIGAN: Well, you know, it’s hard to say until you get the final tax bill, but it’s… as it’s presented right now, certainly consumers win. I do think though corporations don’t win. They would probably like to see some tax relief obviously because they need to invest and keep investing in this new economy.
GWEN IFILL: Thanks, everybody, very much for joining us.