- The Washington Times - Wednesday, May 21, 2003

Victory on the tax bill is so close now that taxpayers and investors can taste it.Let’s just hope that Republicans don’t find a way to snatch defeat out of the jaws of victory. As one influential Senate aide confided to me yesterday, “We’re very close to winning, but don’t forget, we’re the party that has a tendency to shake salt on our pudding pie.”

One strong confirmation of the extent of the victory for tax cutters last week in the Senate is that the left has gone apoplectic over the tax bill that passed by 2 votes. One of my common TV and radio sparring partners, a former Clinton administation economist, moaned the other day: “This was a complete victory for your side. There is no way to sugar coat this setback for the Democrats. Congratulations.”

Even better news comes from Monday’s Wall Street Journal. The front page story screams: “Tax Cuts Are Bigger Than They Look in Budget.”

Ahh, music to my ears. Here is what has the Journal’s reporters all worked up in a frenzy: “The tax cut approved by the Senate would repeal the tax that shareholders pay on dividends. It would allow investors to shield half their dividends from income taxes this year and all dividends for the next three years. [Hooray.] After that, the dividend tax would return in full.”

Now here is my favorite part: “But neither friends nor foes of the dividend tax expect Congress to reinstate the tax in 2007.” If the dividend tax is permanently repealed, the real price tag of the tax bill is at least $700 billion.

Getting the dividend tax to zero, if even for three years, is a very big deal. If you had asked me at the beginning of the year, what are the chances of getting 51 votes in the Senate for a full elimination of the dividend tax in the United States, I would have said about the same likelihood that the Cubs and White Sox will meet in the World Series (which Vegas oddmakers say is a 1 in 1,000 longshot). Well, we just hit the jackpot.

So what do House and Senate negotiators need to do now to take the best of both bills and pass a truly heroic and historic pro-growth tax bill?

Three things:

1. Eliminate the nasty tax increases in the Senate bill. The Senate bill contains $70 billion in tax increases on Americans workers and companies doing business in foreign countries. These provisions are ill-designed and economically unjustified. Republicans should not be in the game of raising taxes on anyone. The House should work to pare down the size of these tax hike offsets.

2. Provide tax relief, not $20 billion in handouts to the states. The tax cut is the best relief that Uncle Sam can possibly give to the fiscally strapped states. Sending $350 billion back to state taxpayers is a powerful stimulant to local economies. Moreover, states should cut back on their spending during these tough times after a decade of rampaging spending by governors. Most states doubled their budgets over the past 10 years. The last thing they need is free money from Congress to continue on with the spending spree. And what is the logic of Congress taking money from a person living in Iowa bringing it to Washington, then sending it back to Iowa? Why not cut taxes at the federal level as much as possible and let Iowans raise their own taxes if need be?

3. To provide more economic punch to the tax bill, cut the capital gains tax, too. The Bush plan provided a capital gains tax for those who own stock in companies that retain earnings. The House bill cuts the capital gains tax to 15 percent. The Senate bill has neither provision. The evidence is clear that when we cut the capital gains tax, the stock market rises and capital gains revenues rise. This tax bill needs to cut the dividend and the capital gains taxes.

The House and Senate have now passed tax bills that are both explosively pro-growth and a major step forward in the never-ending battle to reform the tax system. One of the nation’s top economists, Brian Wesbury of Griffin, Kubik and Stephens of Chicago, says this tax bill could turn out to be “the best pro-growth tax bill since the Reagan tax cut in 1981.”

He also predicts that if a tax bill with the positive features or the House and Senate versions passes, we could see a strong economic and stock market recovery starting in the second half of 2003 and right through 2004. Republicans should like that scenario.

Of course, the gamble is that once we get the dividend tax down to zero, that no one in Washington would actually be foolish enough to propose raising it back up to 35 percent in 2007. Of course, you can make a lot of money gambling that Congress will do monumentally stupid things, but in this case I agree with the Wall Street Journal assessment that when we get to zero, we will stay there.

If the tax cutters prevail, in just three years President Bush will have succeeded in eliminating the death tax and the dividend tax while lowering the top tax rate from 40 percent to 35 percent. One step at a time, this president is taking us down the path to the promised land of a simple, fair and pro-growth flat tax.

Shhh. Don’t tell anyone.

Stephen Moore is president of the Club for Growth.

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