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    Bush Yet to Flesh Out Domestic Agenda

    BY Warren Vieth
    08/23/2004
    by Warren Vieth on 8/23/04.

    WASHINGTON — With only a week to go before the Republican National Convention, the lack of details in President Bush's second-term domestic policy agenda has left some conservative activists worrying aloud about the Vision Thing.

    But analysts from both parties make the case that although the individual pieces of Bush's emerging agenda may not appear that weighty or new, they still add up to something big.

    Bundled within overlapping themes of tax reform and economic "ownership," they say, are initiatives that would, if enacted, move the country toward fundamentally different systems of taxation and social insurance.

    Wage income would be taxed at something close to a flat rate instead of today's graduated rates. Investment income would be largely tax-free. And individuals would shoulder more of the risk for their retirement, in return for potentially greater rewards.

    "If you tell liberals that we're going to have a flat tax, that's like putting a cross in front of a vampire: They start cringing," said Stephen Moore, president of the Club for Growth, a conservative fundraising organization. "By doing these things in little bitty steps at a time, it's sort of like a slippery slope, but in the right direction."

    "What they're trying to do is a radical transformation of the tax code," said Peter Orszag, a former economic advisor to President Clinton and now a senior fellow at the centrist Brookings Institution. "They're trying to do it in little pieces rather than all at once. The sum of all those pieces would be a radical change."

    Analysts and advisors, including some who have been conferring with the administration, said the president's short list of second-term priorities would probably consist of:

    • Making first-term tax cuts permanent instead of letting them expire at various points over the next seven years. The cuts include lower income-tax rates, expanded breaks for married couples and families, reduced taxes on dividends and capital gains, bigger corporate tax deductions and a phased-out inheritance tax. Cost: about $1 trillion over 10 years.

    • Allowing workers to divert a portion of their Social Security payroll taxes to new individual retirement accounts over which they control the choice of investments. Like 401(k) plans, their future value would depend on market performance, not government guarantees. Cost: $1 trillion over 10 years to maintain promised benefits.

    • Scaling back the alternative minimum tax, which was instituted to ensure that wealthy filers wouldn't be able to shelter all of their income from taxes, but has begun to bite at the middle class because of income inflation. Cost: perhaps $500 billion over 10 years.

    • Creating new vehicles — including lifetime savings accounts and retirement savings accounts — for reducing future taxes on savings and investment. Cost: minimal over the first 10 years, but increasingly large as future earnings are withdrawn.

    • Expanding health-savings accounts, which allow Americans to accumulate money tax-free for future medical expenses, and creating similar homeownership tax breaks, such as credits for first-time buyers. Cost: uncertain.

    On the campaign trail, Bush for the most part has stuck to perennials from his six-point plan for economic growth, such as tort reform, energy legislation and more tax cuts. But he has been throwing in a few hints about his "ownership society" agenda.

    "During the next four years, we'll help more citizens to own their health plan, to own a piece of their retirement, to own their own home or their own small businesses," Bush told supporters at a Washington fundraiser last month. "We'll usher in a new era of ownership in America, with an agenda to help all our citizens save and build and invest, so every person owns a part of the American dream."

    "We'll be working to build a culture of ownership in America," he told participants in a voter round-table in Annandale, Va., this month. "We want more people owning things in this country."

    The lack of specifics has rattled some conservatives. Like his father 12 years ago, they say, Bush needs to articulate a bold domestic agenda, or risk losing the election by seeming out of touch with voters' pocketbook concerns.

    "He needs to do something to assure core supporters that things aren't out of control … and that the administration stands for something," said John Samples, director of the Center for Representative Government at the libertarian Cato Institute.

    Former Republican congressman and Secretary of Housing and Urban Development Jack Kemp, a tax reform advocate, said he was optimistic about what he was hearing from Bush.

    "On the stump, he's talking about this ownership society, about stakeholder democracy and the democratization of capitalism," Kemp said. "I've been working with the platform drafters, and I have a good feeling they're going to be articulating these ideas."

    Any fears about Bush's vision will be laid to rest when he takes the podium in New York on Sept. 2, the final night of the Republican convention, his supporters say.

    Greg Valliere, chief strategist for the nonpartisan Charles Schwab Washington Research Group, agreed that Bush would trumpet his tax and ownership themes at the convention.

    But he thought the president would stop short of endorsing an aggressive tax overhaul initiative, which could entail eliminating popular tax breaks such as the mortgage interest deduction, or calling for a specific Social Security privatization plan containing offsetting benefit cuts or payroll tax increases.

    "Obviously, there are some activist conservatives who want to see him come up with a blockbuster, but I think his inner circle will be more cautious," Valliere said. "You need to prepare people for this. You need trial balloons. Big ideas create fat targets. I think it's unlikely there will be anything huge."

    Bruce Bartlett, senior fellow at the conservative National Center for Policy Analysis, said foreign policy would dominate Bush's second term and that the "ownership society" agenda would become largely rhetorical.

    "It sounds to me like something a focus group came up with," Bartlett said. "There's a desire for something meatier, but I just don't think they have anything to give them. So they're going to try to substitute rhetoric for substance, and hope that's good enough to get them through the election."

    Even if Bush surprised the skeptics and pushed hard for aggressive second-term domestic initiatives, it remains uncertain whether Congress would have the stomach for such change in the face of widening federal deficits.

    It also is unclear whether the public would be eager to assume more "ownership" of their financial futures in the aftermath of the stock market collapse, mutual fund scandals, diminished 401(k) account values and a struggling job market.

    "For 90% of the population, ownership is nice but a job is what matters," said chief economist Bill Cheney at MFC Global Investment Management in Boston. "When the job market was tight back in '98, '99, people were happy to be diverted toward the issue of stock ownership. But right now, I don't think that's front and center for most people."

    Robert B. Reich, labor secretary under President Clinton, said he viewed Bush's ownership agenda as new packaging for a collection of old ideas that would widen the gap between rich and poor.

    "Ownership implies the middle class has some savings with which they can own something," said Reich, a Brandeis University professor and advisor to John. F. Kerry. "The stark economic reality is: America's middle class has no savings."

    Because of the enormous costs involved, some analysts think the president, if reelected, would be forced to choose between extending his tax-cutting campaign or partially privatizing Social Security.

    "I'm almost at the point where I would be willing to forgo tax cuts or tax reform in a second term in order to get Social Security reform," said economist Daniel J. Mitchell at the conservative Heritage Foundation. "In terms of people having ownership … Social Security reform is the big enchilada."

    Robert Reischauer, president of the liberal Urban Institute and former director of the nonpartisan Congressional Budget Office, said he too doubted whether Bush could accomplish all his second-term domestic policy priorities.

    But he disagreed with those who thought the president's agenda was bereft of big ideas. Extending the first-term tax cuts alone would cement in place a huge shift in federal finances from the big projected surpluses of the late 1990s to an era of deficits with no clear end in sight, he said.

    "That … would change the nature of our government for decades to come," Reischauer said, adding that the administration's efforts to move toward a wage-based tax system and partial privatization of Social Security were equally radical.

    "The ideas are too big … to fly," Reischauer said. You can talk about them, but you can't get them off the runway."

    Orszag, the Brookings economist, said the administration's efforts to overhaul the tax system were leading to a transformation almost as far-reaching as the adoption of a national sales tax in one fell swoop.

    "We've had an income tax in the United States for the past 90 years," Orszag said. "Regardless of whether your income comes from wages or investments, it is subject to tax to support government programs."

    The administration's goal is to create a system in which only wage income is taxed, he said. The benefits include potentially higher rates of savings and investment. But the tax code would become more regressive, taking a larger percentage of income from low-income groups, because recipients of inherited wealth would get a free ride.

    Moore, the Club for Growth fundraiser, said he thought some fellow conservatives underestimated the president's tax and ownership initiatives. Some might appear limited in scope, he said, but their cumulative effect would be enormous.

    "It's sort of like the way liberals create entitlements by getting their nose under the tent and then growing the programs," Moore said. "That's what Bush has done. He's gotten the camel's nose under the tent."