Class politics is back—rich versus poor, haves versus have-nots, coupon-clippers versus the sons of toil. Does that mean "Happy Days Are Here Again" for the Democratic Party? President Bush's economic plan overwhelmingly favors the wealthiest Americans. The president is up-front about it. "There's no better way to help our economy to grow than to leave more money in the hands of the men and women who earned it," Bush declared on January 7.
Democrats are aghast at the brazenness of his proposal. "This plan is obscene," said Senate Minority Leader Thomas A. Daschle, D-S.D. "It is wrong in how it is directed to the wealthy. It is wrong in how it is timed to benefit the rich, not this year, but years beyond." Bush's response: There they go again. "If some would like to turn this into class warfare, that's not how I think," he said.
Democrats have been down this road many times. Way back in 1896, William Jennings Bryan lambasted the rich at the Democratic convention: "Thou shalt not crucify mankind upon a cross of gold!" As recently as 2000, Vice President Gore ran for president on the theme "The people versus the powerful." Funny thing, though—both Bryan and Gore lost.
But now, Bush has come up with a plan so blatantly skewed toward the rich that Democrats see a juicy target. Former Vermont Gov. Howard Dean, a presidential candidate, charged, "Clearly, it is the Republicans practicing class warfare, because [the tax plan] is for one class of people, and that is not us."
The centerpiece of Bush's plan is his proposal to stop taxing income from dividends. According to the Tax Policy Center, nearly two-thirds of that tax cut would go to the wealthiest 5 percent of taxpayers. Remember the "supply-side" economists? They're the guys who convinced President Reagan back in the 1980s that he could cut taxes and still balance the budget. It did not quite work out that way. And supply-siders blamed Congress for refusing to cut domestic spending.
Supply-siders, such as Club for Growth President Stephen Moore and former Reagan economic adviser Lawrence Kudlow, have been railing against the dividend tax for years. They hate the idea that earnings can be taxed twice. Corporations pay taxes on profits, then shareholders pay a tax on dividends. "Outrageous!" cry the supply-siders, even though lots of money is taxed twice. Ordinary income, for example, is first hit by income taxes, then by sales taxes.
Administration insiders recall a key moment at the White House Economic Forum in Waco, Texas, last August. Business leader Charles Schwab was addressing a panel, as the president busily took notes. "They ought to reduce the double taxation of dividends," Schwab said, "encourage companies to pay more in dividends and reward long-term investors." Bush responded, "I love your ideas about the double taxation of dividends. That makes a lot of sense."
Why is this suddenly the time for a dividend tax cut? Because the stock market has been dropping for two years. Thus, the idea can be sold not as a tax cut for the wealthy, which it is, but as a way to boost stock prices, which it could be. "By ending the double taxation of dividends, we will increase the return on investing, which will draw more money into the markets," Bush said in announcing the plan. As Club for Growth President Moore put it, "Ninety-eight million Americans who are investors are going to benefit from this. Anyone who owns stock is going to see an increase in the valuation of their stock."
That would be good news for the millions of Americans who hold stocks in their pension plans. They won't get a tax cut, however, because their dividends are not taxed now. And they'll still have to pay income taxes on those earnings when they retire and take money out of their accounts.
Democrats know that class politics paid off big-time for them in the 1930s, when President Franklin Roosevelt attacked opponents of his New Deal. "These economic royalists complain that we seek to overthrow the institutions of America," FDR thundered to the 1936 Democratic convention. "What they really complain of is that we seek to take away their power." Notice how it happened: Roosevelt was doing something to turn the economy around; Republicans were resisting.
Class politics did not work for Democrats in the 1980s, when they accused Reagan of favoring the rich. That's because the tables were turned. Reagan was doing something to turn the economy around; Democrats were resisting.
Now Bush is proposing an ambitious plan to turn the economy around. He knows what happened when his father failed to do that in 1992. The current president has defended his plan by saying, "I proposed a bold plan because the need for this plan is urgent." Meanwhile, Democrats are resisting. "It's an enormous budget buster," Sen. John Edwards, D-N.C., complained. "The president has presented no plan to get us back to a balanced budget, back to surpluses, and this is going to deepen our hole on deficit spending."
See what's happened? Democrats have taken up the cause of fiscal responsibility—the same hopeless cause that Republicans defended in the 1930s. House Democrats have come up with their own economic plan, one that is only one-fifth as large as the president's.
Democrats can't afford to be bold. That's their problem.