George Bush has just come out for a rewarmed version of voodoo economics, which deserves to be called clown economics. The Vice President has proposed that we cut the heart out of one of the Reagan Administration's proudest and best achievements--the monumental tax reform that was passed with so much effort just last year.
The reform eliminated the tax breaks and loopholes that previously had allowed the well-off to escape a fair share of taxes. Now Bush has come out for a return to tax breaks for capital gains. He is also advocating bringing back favored tax treatment for his old colleagues in the oil and gas industry.
Not content with bashing tax reform, which is an outstanding Reagan success, Bush has decided to reenact an outstanding Reagan failure--by claiming that the new lower tax rate he proposes for capital gains won't cut government revenues. It will actually raise them, he says. George Bush's brand of rhetoric lends a gee-whiz, naive air to his endorsement of supply-side economics. He says it "won't cost the government a dime" and that it "will create more jobs than you can imagine."
Before tax reform, ordinary income--the wages you got from working on a job, the interest fromyour savings, or the dividends or profits from a business was taxed at the regular rate. Capital gains--the money made by selling an asset for more than you paid for it, was taxed at only 40% ofthe rate paid on ordinary income. The low tax rates on capital gains became the foundation of thousands of clever schemes to avoid taxes. Some of the most brilliant people in the country were diverted from useful work into cooking up such schemes.
These clever people waterlogged the American economy with artificially expanded industry. The main purpose of these outfits was not to compete with the Japanese, or even to make a lot of money. They were designed to dress up dollars of ordinary income to masquerade as dollars of capital gains in an affluent taxpayer's return, so as to be eligible for the lower tax rate. The main trick was to claim deductions for fictional depreciation. The deductions were subtracted from the income side of the ledger and added back in on the capital gains side. It was legal, but it wasn't fair, and it wasn't advancing our economy.
This is the miasma to which Bush wants us to return. Back in 1980, it was Bush who ridiculed the claim that giving tax breaks will increase tax collection by calling it "voodoo economics". When he joined the Reagan team, Bush was forced to put that pungent description under wraps. Of course, the massive deficits that were caused by the tax cuts proved he had been right. With the deficits still out of control, nobody, at least not recently, has been nervy enough to claim that tax cuts make money for the treasury. Amazingly, Bush has now become a publicly announced convert. Maybe it's to display manly bravery. The tax reform bill, which culminated decades of effort by Democrats and Republicans, offered high income taxpayers a deal. They lost many of their tax loopholes, but the rates they had to pay on ordinary income were drastically lowered. Now Bush proposes to restore their most important loophole, but firmly rejects a rise in tax rates.
Every time George Bush has made the news since formally announcing his candidacy he has moved further toward appearing to be a "rich people's candidate." His remark about those good Russian tank mechanics echoed the denigration of American blue collar workers by well-heeled Americans who never get their hands dirty. His excuse for the setback he suffered in Iowa was that his supporters were off at rich people's diversions--playing golf or attending their daughters' coming out parties.
By themselves, these Bush remarks might be passed off as random miscues. But when such patrician comments are followed closely by proposals to reopen tax loopholes for the affluent, it begins to look like a syndrome.