The 9/11 Tax Giveaway

And how one Treasury official tried to stop it.

Ron Suskind, the author of The Price of Loyalty and the recipient of 19,000 documents from former Treasury Secretary Paul O’Neill, has added two more documents to his growing online library of Bushiana. The latest entries show that Mark Weinberger, the assistant treasury secretary for tax policy, worried after Sept. 11 that the Bush White House would exploit the tragedy by pushing through a huge tax cut that lacked bipartisan support. In a memo to O’Neill dated Sept. 17, 2001, Weinberger wrote:

Should the administration propose a comprehensive expansive tax cut proposal, without bipartisan input and support, I believe we risk opening up partisan wounds and fighting in a time when that risk, perhaps above all, could be most devastating to our national healing.

Weinberger’s worries were well-founded. On Sept. 25 the Senate Finance Committee held a closed-door meeting with Fed Chairman Alan Greenspan, former Treasury Secretary Robert Rubin, and Larry Lindsey, director of the White House’s National Economic Council. O’Neill was invited too, but he didn’t attend. Instead, he received a written summary.

At the meeting, Greenspan and Rubin urged caution, noting that the full impact of 9/11 on the economy was not yet clear. Lindsey, however,

disagreed about waiting before acting on a stimulus. He said we need to act quickly to attack “risk aversion” on the investment side directly, and said his preferred way of doing this was to lower the corporate income tax.

Inside the White House, Suskind reports in The Price of Loyalty, Lindsey was already pressing for a tax cut of $150 billion.

A mere four months earlier, the Bush administration had pushed a $1.7 trillion tax cut through Congress. Now, just as Weinberger feared, Bush tried to use 9/11 as a pretext to accelerate that tax cut (“The terrorists attacked us, but they did not diminish our spirit”). It didn’t work on the first go-round; the relatively uncontroversial $42 billion tax cut that Congress passed in March 2002 merely accelerated depreciation for businesses and extended unemployment benefits by 13 weeks. But in January 2003, President Bush proposed an additional $925 billion tax cut. Once again, Bush did precisely what Weinberger had warned against—he intertwined an enormous and divisive tax-cut proposal with the post-9/11 war on terrorism:

We’re meeting the challenges to America. We’re strengthening our economy, and we’re taking a battle to our enemies. And we’re not going to leave our work half-finished. In the months ahead, we’ll confront every threat to the safety and security of the American people. We’ll press on to turn our recovery into lasting growth and opportunity that reaches every corner of America.

This time, it passed.

When Greenspan, Rubin, and Lindsey met with the Finance Committee, it was widely predicted that 9/11 would cause a recession. In fact, they would learn two months later, a recession had already begun the previous March, and would last only until November 2001. The Bureau of Economic Research, which charts recessions, says that 9/11 “deepened the contraction and may have been an important factor in turning the episode into a recession.” But it took only two months for the economy to start expanding again, albeit weakly and without much job growth. (Chatterbox is not too fine a person to point out that he predicted as much on Sept. 12, 2001.) So, in addition to “opening up partisan wounds,” Bush’s exploitation of 9/11 to pass the third tax cut was completely unnecessary. And by ballooning the budget deficit to an estimated 477 billion, it will likely harm the economy over the long term. Here’s yet another reason (not that any is needed) to loathe Osama Bin Laden.