The Tax Cut Expansion
The Labor Department said Friday that the U.S. jobless rate fell to 5% in June, the lowest since 2001. Federal tax revenues continue to rebound, at a nearly 15% annual rate so far this year, and economic growth continues to average nearly 4% despite $60 oil and rising interest rates. Maybe it's time to give the tax cuts of 2003 the policy credit they deserve.</br></br>More broadly, it's time to draw a few lessons from the fiscal policy debates of the Bush years. For we now know who was right, and who wasn't, going back to the proposals that were offered to restore growth after the dot-com bubble burst and through the 2001 recession and the aftermath of 9/11.</br></br>The big economic fight of the first Bush term was over fiscal policy, especially the size and design of tax cuts. The neo-Keynesians and believers in Rubinomics proposed temporary tax cuts through tax rebates to boost consumer spending. Jon Corzine, the point man on taxes for Senate Democrats, was insistent on the rebate idea.</br></br>Unfortunately, President Bush agreed, in part to get 12 Democratic votes in the Senate and in part because some of his advisers also fell for the Keynesian illusion that temporary tax cuts would spur growth. So he agreed to phase in his own marginal-rate income tax cuts over several years, while passing out $500 rebate checks immediately to American families in order to increase demand for goods and services. While this tax cut may have been a political success, it was an economic flop, as growth retreated again in 2002 after a one-time bounce.</br></br>The tax cut debate resumed in January 2003, however, as Mr. Bush decided to pursue a more supply-side course. This time he aimed his tax cuts directly at the collapse in business investment, proposing to eliminate the double tax on dividends and to accelerate his income tax cuts at the top marginal rates. House Ways and Means Chairman Bill Thomas compromised on a 15% dividend rate but added a capital gains cut to 15% (from 20%).