AmericanMemorandum
To: Friends of ABC From: John Endean Date: January 18, 2002
RE: Some Final Notes on the Daschle Speech
Earlier this month, Senate Majority Leader Thomas Daschle (D, SD) addressed the Center for National Policy on the American economy. The Senator quite correctly regarded his remarks as significant and wanted others to think so as well. The gist of his speech was communicated to the press in advance, assuring several days' worth of coverage, and the text was accompanied by admiring comments from two very distinguished members of the Democratic party, Robert Rubin and Leon Panetta. Such enhancements were prudent: politicians know that speeches on economic policy are rarely stemwinders.1
In covering the speech, however, reporters focused pretty narrowly on Mr. Daschle's criticisms of last year's tax cut bill. The centerpiece of that bill was a schedule of cuts in the personal income tax, most of which have yet to be fully phased in. Senator Daschle said that the tax cuts were the main cause of "the most dramatic fiscal deterioration in our nation's history" and that they had made the current recession "worse." Because the tax cuts have yet to come into effect fully, many observers, including one who resides in the White House, found these charges dubious.
The merits of the Senator's charges and President Bush's strong reaction to them have been extensively discussed. I have nothing to add to the commentary. However, before moving on to what I take to be more interesting, or, at least, less remarked upon, parts of the Senator's speech, I cannot help but address his view, offered almost as a throwaway line, that last summer's tax cuts went "disproportionately to the most affluent."
By design, the federal income tax is inherently "disproportionate." Upper income individuals pay a higher percentage of their income in taxes than lower income individuals. I think this is good tax policy, but it implies that any proportionate cut in the income tax must yield disproportionate results. Across-the-board cuts in the income tax mean that higher income individuals will get back more money as a percentage of their income than lower income citizens. This does not change the overall progressivity of the income tax.
As elementary as this is, people tend to forget it. So let's look at the numbers. The following chart, compiled by William Gale of the Brookings Institution and relying upon data from the Congressional Budget Office and Citizens for Tax Justice, tells an interesting story about the distributional effects of last summer's income tax cuts (assuming those cuts are fully phased in).2
Income Group Share of Income Tax Burden Share of Income Tax Cut Lowest 20% -2% 1% Next 20% 1% 7% Middle 20% 7% 11% Next 20% 16% 18% Top 20% 79% 64% Middle 20% 7% 11% Top 10% 63% 46% Top 5% 50% 35% Top 1% 29% 25%
This chart suggests that last summer's tax cut will ultimately result in a personal income tax that is very slightly more progressive than it was before the passage of the bill.3 I note this not as a defense of the tax bill which is flawed in many, many ways and which, in any event, I doubt will ever fully come on line. My far more general point is that if Mr. Daschle or others really desire a more progressive income tax code, they should make the case directly. At least insofar as the income tax is concerned, last summer's tax legislation would not make the code less progressive and the confusion over this fact, willful or not, will inevitably influence for the worse any new discussions over the future of income tax reform.
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Leaving aside his critique of last year's tax bill, what does his speech say about Senator Daschle's economic worldview? What is striking, at least to me, is how close it is in some ways to the President's perspective.
Take trade as an example. "Our society," the Senator said, "benefits from greater trade and globalization" because "no country is better situated to thrive in this global information economy than the United States of America." For that reason, he told his audience, he would support trade promotion authority legislation, an Administration priority, and announced his intention to bring up the bill for a vote in the Senate in "early" 2002.
Although the Senator's words on trade and trade promotion authority are to me unexceptionable, in the current political environment it took courage for him to utter them. The woods are not exactly full nowadays of Democratic politicians willing to speak forthrightly about the benefits of trade and "globalization." Even fewer are inclined to grant a Republican President the procedural means to negotiate market-opening agreements. After all, only twenty-one Democratic House members supported trade promotion authority when it came to a vote late last year.
As with trade, so with other issues: Senator Daschle's economic priorities often parallel the White House's agenda. His differences with the President are on detail, not on direction; his operating philosophy, when it comes to the Bush agenda is "yes, but."
Like the President, the Senator wants a "balanced, national energy plan" (but without "opening sensitive wilderness areas to oil drilling"). He agrees with Mr. Bush on the desirability of creating "private accounts" for Social Security (but only as a supplement to the current system, not as a replacement). He supports the President's recently signed education bill (but only if we "build on it" with further legislation). He is more than happy to support the Administration's request for $15 billion in homeland security funding (but he remains "puzzled by the timing of the request" which, he believes, should have been made last year).
I don't know whether Senator Daschle's "yes, but" approach is some sort of Clintonesque triangulation, or his felt need to occupy a centrist position in anticipation of running for the Presidency, or simply a reflection of his mostly Republican constituency in South Dakota. In any case, it's striking.
Here is a leader of the Democratic Party who, in a major economic policy address, hardly mentions the problem of persistent poverty except to say that he supports the "re-authorization of our bipartisan welfare reform laws." And, looking back on the Clinton years, which he sees as a kind of economic golden age, Mr. Daschle notes approvingly that during that time [w]e created more millionaires and billionaires…than at any time in our nation's history while creating a boom that raised family incomes across the board." This celebration of wealth creation is remarkable coming from a Democratic leader (although I do have a bone to pick over the failure of the fabled "we" to drop by my house to "create" a billionaire out of me. Or even millionaire: millionaire is good).
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In Senator Daschle we are dealing with a pro-growth Democrat who believes that a rising tide lifts all boats. So how does he propose to raise the water level?
It's instructive to see how he interprets the economic success we witnessed from roughly 1993 to 2000. For Senator Daschle, as I noted, this was the golden age of the American economy. It was a time when "we" decided "everything we did had to fit into a new framework of fiscal discipline." Who "we" are is left unclear, although presumably Senator Daschle includes himself in that group, along with, I guess, Bill Clinton, Alan Greenspan, and Robert Rubin. (I don't know if Republican Congressional leaders during that period make the cut or not.)
In any case, Senator Daschle is surely right that the 1990's were a period of extraordinary economic growth. But was the "new framework of fiscal discipline" - such as it was - the cause of this growth? Or did the tremendous growth of the 1990's, courtesy of the private sector, so swamp Washington in unanticipated tax revenues that federal budget surpluses appeared without forcing any difficult spending choices on President Clinton and Congress?
Senator Daschle believes that the growth of the 1990's was a function of decisions made in Washington. Rather than a condition or even a by-product of economic growth, his concept of a "new framework of fiscal discipline" seems to him to have been a cause of that growth. From that assumption it is a very short step to his conclusion that last year's tax cut, because it violated his sense of the "new framework," had worsened the recession.
That assumption also explains the relative absence, in the Senator's speech, of business issues. Even in light of the Enron bankruptcy, he had nothing to say about the functioning of the capital markets. He was silent on deregulation, on litigation reform, on antitrust, and on a host of other business-related matters likely to come before Congress.
Especially telling are his views on business taxation. He clearly does not think that permanent, structural changes in the way we tax business activity and investment are worth pursuing. Senator Daschle's preference is for "targeted" tax cuts. Targeted cuts are cheaper than across-the-board reductions. More important, targeted tax cuts allow the Senator to promote specific kinds of economic activity that he happens to like or that are politically sexy. For example, he's keen on broadband Internet access and so is all for creating "tax credits, grants, and loans to make broadband service as universal tomorrow as telephone access is today." What justifies this privileged treatment, what market failure he is trying to correct, the Senator does not say.
Similarly, Senator Daschle wants to make the research and development tax credit permanent - "the sooner, the better." This choice piece of corporate welfare is, the Senator admits, "expensive." But he thinks the cost justified because "the R&D tax credit is one of the most effective mechanisms to encourage innovation, increase business investment and keep the economy growing." Supplementing a permanent R&D tax credit, the Senator urged Washington to kick in some extra research money to nurture such captivating things as "nanotechnology, robotics, advanced energy technologies like fuel cells and solid state lighting, and biotechnologies like gene therapy."
Beyond taking special pains for broadband technology and research and development, Senator Daschle seems rather incurious about the workings of the rest of the business community - the people and companies not on the cutting edge of nanotechnology or solid state lighting, for instance. He sees the rest of the business community much like my college roommate viewed the heap he used to drive around campus: a balky machine that had to be whacked once in a while to keep it running but that otherwise could be ignored.
The first whack the Senator would deliver he calls the "Jobs Creation Tax Credit." This would be available to every American business for one year. During that year, if a business hired new people or provided existing workers with a raise, the government would reimburse the extra payroll taxes such actions would normally entail.
It's easy to see what the Senator's after - and to sympathize with his aims. He wants the unemployed to find work and the currently employed to earn more. Rather than think systematically about desirable permanent changes in the tax code or in the regulatory environment that might allow businesses to expand more rapidly and thereby add to their payrolls, he would short-circuit that cumbersome process by having Washington bribe businesses to do the right thing - for a year.
The best that can be said about this scheme is that it wouldn't work. A marginal and temporary change in the payroll tax will not spark a hiring boom or a wave of bonuses: job creation and higher wages are a function of the health of the economy and productivity gains. And, of course, even a one-year cut in the payroll tax would seem to fly in the face of Senator Daschle's desire, articulated elsewhere in his speech, to preserve the financial integrity of Social Security and Medicare.
The Senator's second whack is a "robust depreciation bonus," lasting one year. He proposes to allow a 40 percent "bonus depreciation" for the first six months and a 20 percent bonus for the second six months. As the Senator concedes, this idea has nothing to do with permanently raising the level of business investment. Instead, it is designed, again, to bribe businesses to accelerate the timing of investment decisions so as to give the economy a quick kick. Once the kick has been administered, the bonuses disappear down the same memory hole to which the Job Creation Tax Credit is to be consigned.
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In summary, I think Senator Daschle's admirably forthright advocacy of economic growth is unaccompanied by any sure sense of the sources of that growth. This is the great disconnect in his speech. The Senator, in a way interestingly reminiscent of Bob Dole, is a man of Washington who has a tough time dealing with the fact - and it is, for better or worse a fact - that American society has endowed the private sector, not the government, with the preponderant responsibility for economic growth and wealth creation.
And what that means is that Senator Daschle's prescriptions for growth, whether sound, such as his advocacy of trade promotion authority, or nutty, such as the Job Creation Tax Credit, all have in common a mistaken assumption that Washington calls the growth tune. It doesn't, but the Senator's belief to the contrary means that he is totally at sea when trying to describe a coherent economic vision with any long-term credibility. He knows where he wants the economy to go but he doesn't know how to get there.
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1 Thus Lyndon Johnson's observation to Kenneth Galbraith: "Did y'ever think, Ken, that making a speech on ee-conomics is a lot like pissing down your leg? It seems hot to you, but it never does to anyone else." John Kenneth Galbraith, A Life in Our Times, (Boston: Houghton Mifflin Company, 1981), p. 450.
2 William Gale, Samara Potter and Emily Tang, "The Bush Tax Cut: The Morning After,"The Milken Institute Review, Third Quarter 2001, p. 49.
3 Not so fast, I can hear the reader saying, there was more to that bill than rate cuts, Mr. Apologist for the Plutocracy. What about estate tax reform? It is true that when Mr. Gale of Brookings factored the elimination of the estate tax into his analysis, the result skewed the overall distribution of the tax cut bill in favor of the top 1 percent of taxpayers, Ibid., pp. 49 - 50. Recall, however, that last summer's bill not only provided for a phase-out of the estate tax, it also mandated the gradual elimination of the step-up in basis on capital gains at death. As far as I know, the revenue and distributional effects of the latter change have not been modeled. If they were, of course, they would mitigate the advantages of estate tax elimination for the top 1 percent of taxpayers because these people would be paying capital gains taxes on realized gains that previously escaped taxation. In short, the jury's out on the ultimate effects of the twin elimination of the estate tax and the step-up in basis. I suspect that ultimately many liberals will conclude as I do that the estate tax/step-up in basis trade-off was a good one - if it happens.
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