Congress will likely pass a tax cut measure that will mean middle-class voters will pay hundreds, and in some cases thousands, of dollars less in federal income tax over the next several years. The goal of President Bush and congressional Republicans: happier voters, faster economic growth and a 2004 election sweep. For the GOP, it’s a race against time: Will the fiscal stimulus nudge the economic data in a positive direction by November of 2004?
Boil the political strategy of the tax cut package down to advertising slogan essentials and Bush is offering “FAST, FAST PAIN RELIEF,” just as over-the-counter remedies do. The key to his re-election hopes is how quickly that relief comes and whether voters will believe it if they see signs of it.
Sometimes, as in the 1992 election, the economy is emerging from a recession, but most voters do not notice it or can’t quite believe it.
It was not until December of 1992, the month after George H.W. Bush lost his re-election bid, that the Business Cycle Dating Committee of the National Bureau of Economic Research announced that the recession had ended in March 1991.
Dramatic improvement, as in the period from 1982 to 1984, is rare but, of course, a boon for a president running for re-election.
In 1984, Ronald Reagan was re-elected when the national unemployment rate was 7.4 percent — today it is 6 percent — but things looked so much better to most voters in November of 1984 because of what the country had just been through.
11 PERCENT UNEMPLOYMENT
The jobless rate had been nearly 11 percent in late 1982 in the worst economic slowdown since the Great Depression.
Today’s “bad” economy would have been quite acceptable to voters and to Reagan in 1984.
For the short term, the signs for today’s jobless aren’t encouraging: Economist Jan Hatzius of Goldman Sachs reported last week that the May jobs report, which the Department of Labor will issue June 6, may show another decline in the number of nonfarm payroll jobs.
The Goldman Sachs forecasting model “is pointing to another drop in the 25,000 to 50,000 range,” Hatzius said, adding that “another decline would be quite significant because it would take the string of unbroken payroll declines to four in a row. In postwar economic history, this is an event that has never occurred outside a recession.”
Meanwhile, even those with jobs have suffered investment pain. “The bear market that ended in October is the longest one since the Great Depression,” mutual fund giant Vanguard noted in a letter to its investors. “It lasted 30.6 months and dropped a heart-stopping 47 percent, as measured by the Standard & Poor’s 500 Index.”
Treasury Secretary John Snow has made it explicit that a major motive for the tax cut bill is to revive the spirits of depressed investors.
“We’re an ownership society now; we’re an investor society,” Snow told CNBC’s Ron Insana last month. “We follow the stock market the way we follow the box scores for our favorite baseball team. With the market down, as it’s been for the last three years, really five years, it’s had a psychological effect.”
DEMOCRATIC ARGUMENTS
Democratic presidential contenders will argue that the tax cuts are an unfair windfall to people with high incomes and will wreak havoc by causing higher interest rates.
How politically effective are either of these Democratic arguments likely to be?
The “tax cuts for the rich” argument is surely a familiar one to voters — they heard it from Democrats in the 1992 and 1998 elections, after the Republicans tried to cut capital gains taxes, estate taxes and dividend taxes and give tax relief to married couples.
Voters heard it again from Democrats in the 2000 and 2002 elections, when Bush and the Republicans touted the income tax cuts that were enacted in 2001.
The Democrats’ interest rate argument, which Senate Democratic leader Tom Daschle first used in September of 2001, has so far not been proven in the bond markets.
The long-term interest rate that most Americans are familiar with, the home mortgage rate, has declined from about 7 percent to 5.8 percent since Bush signed the 2001 tax cut bill. Other long-term rates have also fallen.
POLITICALLY FUTILE?
The Democrats also contend that, even apart from the economic effects of the tax cuts, voters do not really want tax cuts, so that the Bush “pain relief” will prove politically futile in any event.
Asked in an NBC News/Wall Street Journal poll conducted last weekend, “Which of the following would you prefer, cutting federal taxes for individuals and businesses or the government providing money to help pay for health coverage?” 55 percent of the 1,000 respondents said they’d prefer more spending on health insurance, while 36 percent opted for tax cuts.
In his campaign appearances, Democratic presidential contender Howard Dean argues that the tax cuts will be trivial for many people. Dean recounts the story of a New Hampshire man who told him, “I remember that $600 rebate check I got from the president’s tax cut in 2001, but my 401(k) account went down $60,000.”
The Democrats will also contend that they — not the Republicans — are the party of fiscal prudence and restraint. Republicans will counter by pointing to the historical record: Most Democrats voted against a balanced budget constitutional amendment when the House OK’d one in 1995. Federal spending and budget deficits grew at a brisk pace when the Democrats controlled both houses of Congress from 1954 to 1994.
Rep. Charles Stenholm of Texas, a conservative Democrat who voted for the balanced budget amendment, told Republicans on Thursday: “I ask my colleagues as one Democrat who used to vote with you — we passed the balanced budget constitutional amendment in 1995 — what’s happened to you? What has caused you to suddenly start saying deficits do not matter?”
BITTER LESSONS OF 2002
There was a bitter tone to the arguments that Democratic members used as they denounced the tax plan in Thursday’s House debate.
Democrats feel chagrined about what Bush did to them in the 2002 elections. Several Senate Democrats running for re-election in 2002 or trying to move up from the House to the Senate voted for the 2001 Bush tax cuts.
Sen. Max Cleland of Georgia, Sen. Jean Carnahan of Missouri and Rep. Bob Clement of Tennessee, who was running for the Senate, were three Democrats who voted as the president wanted. The thanks they got from him? Bush came into their states and campaigned against them. All three lost.
Partly as a result of the Cleland-Carnahan-Clement lesson, only a few congressional Democrats are likely to vote for this year’s tax cut.
And among rank-and-file Democrats, the feeling is that the only option for the party is to oppose Bush on all fronts, at all costs. The party faithful are looking for a presidential candidate who will denounce the tax cuts as fiercely as he does Bush’s Iraq policy.
Democratic contender Dick Gephardt has called for repealing all the Bush tax cuts, even the ones enacted in 2001. If the nominee is not Gephardt, he will need to decide how much of the tax cut package he proposes to repeal. And on the campaign trail, voters will likely hear Bush saying, “they want to raise your taxes again.”