It isn't about the economy. It isn't about meeting the needs of the country. It certainly isn't about managing the federal fisc. No. The new tax cut is about cutting taxes on the rich. Texas-style.
Here in Texas, mother state to George W. Bush, we don't pay state income tax. Our public services ("Mississippi with roads") are financed through sales and property taxes. For the rich, these are very minor burdens.
Bush's new law will give a taste of Texas taxation to the whole country. Tax on dividends will go down to nothing - supposedly for only a few years, but that's a joke. Tax on capital gains will drop to 15 percent. The top rate on the income tax comes down to 35 percent. Add to this the in-progress reduction of the estate tax, and the pattern is clear. It will be great to be American - if you are very rich.
But suppose you actually want to live here? The tax bill throws peanuts at the fiscal crisis of the states. Sales taxes will keep going up. Poor people pay those. Property taxes will rise relentlessly, as they are doing down in Texas. Middle-class folk pay the property tax. Funds for schools, health care, transportation and the environment will be cut. In Texas we are cutting almost 10 percent from state university budgets next year, just for starters. There is a tragic threat that vital mental health institutions here in Austin will be closed. Expect to see a lot like this coming soon to a neighborhood near you.
Cutting taxes on corporate dividends might boost the price of stock a bit. But the capital gains cut - a bonanza for old money - is an incentive to sell. And so long as earnings are weak, price/earning ratios remain high. So who knows which way the market will go? Anyway, with a bad investment climate, stock prices aren't going to save us, whatever they do.
For the 2004 election, Bush is really counting on Alan Greenspan, to whom he has already guaranteed reappointment, to keep interest rates low and the housing bubble inflated. (Greenspan knows about blowing bubbles.) Yes, that means the dollar will go to the dogs. But so what? Thanks to the occupation of Iraq, oil prices are under American control. There won't be an inflation shock. The main burden will fall on our neighbor Mexico and on China, who will keep their prices fixed in dollars in order to continue to sell to us.
The train wreck will come after the election. The Fed will turn about, and the collapsed dollar will be declared an inflation threat. So much for today's "deflation" talk, which is mostly nonsense. Interest rates will be raised "in order to defend the dollar," as the Fed will say. Households will hit the debt wall. The housing bubble will pop. Household spending will tank. Many will lose their over-mortgaged homes.
As economic activity drops, budget deficits will mount. And then our Republican leaders will remember all those hymns to "fiscal responsibility," which they have now so carefully forgotten.
To meet the "fiscal crisis," Congress will then have to choose between deep cuts in spending, including the privatization of Social Security and Medicare, and allowing the tax breaks just enacted to expire. Of course, they will say that a recession is not a time to "increase taxes."
Unemployment will creep up slowly before the election, attracting little attention if overall growth stays positive. But after the election joblessness may well get much worse. And if the dollar defense works, the resulting gigantic trade deficit will cause U.S. demand to leak away to imports. That will make it very hard for the economy to grow. States and localities will continue to cut, until even public schools are no longer viable for the middle class.
And then, the Bush Revolution will be complete. Just as Lyndon Johnson's Great Society sought to complete Franklin Roosevelt's New Deal, Bush's plan is to finish up Ronald Reagan's first two years. Reagan wanted to take down Social Security at that time - but the Democrats stopped him. And so Reagan turned to other tasks, including patching up the damage of his own first tax cuts. It appears that Bush in 2005 is determined to complete the project of 1981.
Just as New York was the cradle of the New Deal, so Texas today is the model. As governor, Bush already did here what he now plans for the country. He cut taxes irresponsibly, earned his spurs, and then moved on. Now his Republican successors are out on the battlefield, executing the wounded.
That will be our fate, too, as a nation, if we let this tax bill lead to election victory for Bush and the Republicans next year.
Copyright © 2003, Newsday, Inc.