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Bush’s Weird Tax Cut

1.

The tax bill is the proudest achievement of George W. Bush’s first six months in office, and it could turn out to be the most important legislation of his entire presidential term—but in ways he didn’t intend. In several respects, the bill typified Bush’s approach to the presidency. The tax bill was based on conservative ideology: not only did it offer the largest rate breaks to the richest people, but it had the explicit purpose of reducing the activities of the federal government. Bush made much of this in the presidential campaign, saying that if the money wasn’t given back to the people, “the politicians in Washington will spend it.” But the harsh intentions behind his tax bill were blurred by his talk about “compassionate conservatism,” his appearances with black children, and the like. Few in Washington were prepared for the determination with which he pursued his tax bill once he took office. He kept adding to the justifications for it: as the economy worsened he said it would help the economy; later he said it would help people hit by rising energy costs.

Bush’s perseverance with the tax bill was typical of the administration’s bulldozing approach to government: pick a few goals and push them and keep pushing them—without showing much concern for how the policy actually turns out, or what its consequences may be. (A Republican senator well disposed toward Bush said to me this spring, “He wants his bills too badly.”) Further, for all his talk of bipartisanship, the administration rushed its $1.6 trillion tax cut (the actual cost was higher) through the House when it thought it had the votes—without regard even to conservative Democrats whose support it might need on other matters. This action, in early March, set off the very partisanship Bush had said he wanted to end.

Bush chose the constituency for his tax bill carefully. The Bush administration is thought, with good reason, to be particularly sympathetic to large corporations and Wall Street. Big business generally favored the Republican Party in 2000, giving it 59 percent of its contributions, or $496 million. The oil and gas industry gave Bush 78 percent of its donations, and the pharmaceutical industry 68 percent. But big business was not the beneficiary of the tax bill. In designing it, Bush and his advisers were appealing to two segments of the party whose backing he needed and craved, both to get elected and to govern. One, whose influence is widely underestimated, but which provides activists and votes, was small business; the other consisted of the leaders and organizations of the Republican right.

Lobbyists for large companies have complained, with reason, that their clients got precious little out of the Bush administration’s tax bill. This is not to say that corporate America has been hurt by the Bush administration. Some companies, such as the extractive industries, made out very well in the President’s proposed energy program. The steel industry got a quota on imports. Large companies that contributed to the campaign bought that most precious Washington commodity, “access” to the President and his top aides as well as to key Republican members of Congress. They will be listened to in matters concerning federal regulations, approval of sales to foreign governments, government contracts, labor disputes, legislation they seek or oppose—the many things that the federal government does that can affect a company’s bottom line.

Small business” is an elastic term: it can include the corner grocery store or your dry cleaner or farmers or companies with up to five hundred employees. The main small business group behind the bill was the National Federation of Independent Business, one of the most powerful forces in the Republican Party. The NFIB, which claims 600,000 members—two thirds of them companies with ten employees or less—helped deliver the House of Representatives to the Republicans in 1994. (They had acquired new energy from their opposition to Hillary Clinton’s health plan.) Well organized from its Washington headquarters, it has between 1,200 and 1,500 members in each of the 435 congressional districts. According to Vin Weber, a former Republican member of Congress and now a successful Washington lobbyist, “The NFIB is a real constituency that delivers votes; big business doesn’t.” Grover Norquist, a prominent conservative activist, told me, “They wanted a tax bill with as broad support as possible. It’s completely true that the bill is more beneficial to small business than to big and Wall Street.”

The most important tax priority for the NFIB has been repeal of the estate tax—or what repeal advocates started calling the “death tax” a few years ago. Before the new tax law, estates above $650,000 were taxed at a progressive rate, up to 55 percent. (There were numerous ways to mitigate such taxes through estate planning and insurance, so that the average estate tax has in fact been less than 20 percent.) Opponents of the estate tax argue that it could force the liquidation of their businesses, but the estate tax doesn’t really apply to truly small businesses: a couple could leave a business worth over a million dollars without its being subject to the tax. (Despite the sob stories about “having to sell the family farm,” The New York Times reported in April that there was no evidence that a single farm had had to be sold because of the estate tax.)

But if the value of the business has appreciated significantly, eliminating the estate tax allows the heirs to avoid paying any taxes on capital gains when they sell assets. While many of those who head small businesses are well enough off to be in the top tax bracket, and many small businesses file individual returns and therefore would benefit from Bush’s proposals to cut tax rates, this was of far less urgency to the small business lobby than the estate tax. Dan Danner, senior vice-president of the NFIB in charge of its lobbying, says, “Individual rates are important, but in terms of our focus the death tax has been more our issue and more emotional for our members.”

While repeal of the estate tax would of course benefit other well-to-do people, such as top corporate executives, they did not organize a significant lobby in support of it. And if Bush expected an outpouring of popular support for his cuts in tax rates, it didn’t materialize. Congress passed a repeal of the estate tax in 2000, but Clinton vetoed the bill. NFIB officials worked successfully with Bush campaign officials to include repeal in Bush’s campaign and in the party platform.

What the NFIB can contribute is its ability to stir up a “grassroots” campaign in which its members, with encouragement from the Washington headquarters, write, call, and fax their congressmen and let their opinions be known. Danner says, “What’s important about that is it puts a real face on an issue. A lot of the members come here to testify and participate in events and say ‘This is my business and this is important to me.’”

Such “grassroots” campaigns have become a major industry in Washington. It’s considered important to convince the elected politicians that “real people”—people who vote—are behind whatever the lobbyist or interest group or corporation is pushing. Unlike the NFIB and similar membership organizations, most corporations don’t have natural “grassroots” supporters and entire businesses have been established in Washington whose specialty is creating them. The professional grassroots-growers, acting on the principle that the most important thing to a politician is to get reelected, draw on people from the town or region where a corporation is located, trying to persuade politicians that there is support “back home” for a client’s request. David Rehr, the president of the National Beer Wholesalers Association, says, “Not many grassroots movements begin outside of Washington, D.C.”

To pursue its goal this year, the NFIB formed the Tax Relief Coalition with other groups of small—or somewhat larger—businesses. They included the National Association of Manufacturers, which represents both large and small manufacturers; the US Chamber of Commerce; and the National Association of Wholesaler-Distributors, who are essentially middlemen. Others, such as the Beer Wholesalers—who are powerful because they have beer distributors in virtually every congressional district—and the National Association of Realtors, also joined the coalition of 1,001 companies and trade associations. The officials of the major organizations know each other well and have been comrades-in-arms during numerous congressional fights, so coalescing in support of the Bush tax bill was natural. Though large corporations heavily finance the NAM and the Chamber of Commerce, Danner says, “This was clearly not a large corporate tax bill—not as proposed by the President or as the process went along.”

One can glimpse lessons from his father’s presidency in much of what George W. Bush has done—especially on the tax bill. One lesson was not to go back on a tax pledge, as the elder Bush did so disastrously. Another was to embrace the party’s right and hold it close. The right essentially abandoned the elder Bush and threw Bob Dole overboard in 1996 as insufficiently ideological. George W. Bush seems in fact more conservative than his father; but people who know him believe that his father’s failure to be reelected remains much on his mind.

The Republican Party’s right consists of several overlapping groups including social conservatives (anti-abortion activists, politically active religious conservatives, home schoolers); anti-tax groups; landowners who want no federal encroachments (the basis for James Watt’s “Sagebrush Rebellion,” of which the current interior secretary, Gale Norton, is a disciple); and intellectuals in such think tanks as the Cato Institute and the Heritage Foundation. Grover Norquist, who heads something called Americans for Tax Reform (meaning the lowest taxes and least government possible), has managed to put all these elements together into a coalition of about ninety groups which meets each Wednesday in his L Street office. He enthusiastically organized them to support Bush’s tax bill.

Norquist first met with Bush ten days after Bush was reelected governor of Texas in 1998, and was won over by Bush’s assurances that he would run for president as a tax-cutting candidate. Norquist says, “Bush viscerally understands we should cut the size of government.” For Bush, Norquist was an important intermediary with the Republican right. Karl Rove, Bush’s chief political strategist, worked closely with Norquist during the campaign and has cultivated him since the election. Norquist strongly favored both the rate cuts and the repeal of the estate tax. Along with some of the groups he has mobilized, he likes anything that deprives the federal government of money. As opposed to the “supply-side” theory of the Reagan tax cut, whose proclaimed goal was to promote growth, the purpose of the Bush tax cut was simply to reduce the size of government. Norquist, a cheerful, bearded fanatic, has a Manichaean view of the world: his goal is to destroy “the left” by “defunding” it.

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