George Bush's Revolutionary Gamble with

America's Future

By Daniel Altman. Public Affairs. 290 pp. $26.95

Daniel Altman sees two revolutions in George W. Bush's presidency, one in foreign policy and the other in tax policy. The latter has received little attention, and in Neoconomy Altman has tried to rectify that. Cleverly borrowing his prefix from foreign policy's neoconservatives, he argues that Bush and his advisers opportunistically used short-term economic weakness to pursue a long-term agenda of tax reform. Harvard professor Martin Feldstein is not exactly the Richard Perle of Altman's tale, but he is credited with serving as a mentor for key advisers to Bush, including former White House aides Lawrence Lindsey and R. Glenn Hubbard. (Altman himself also studied under Feldstein.) These economists want to expand the economy by increasing saving -- that's the neoconomy, as Altman defines it. More saving should lead to more investment, which in turn leads to greater economic growth.

So the Bush tax agenda isn't just about cutting taxes; it's also about promoting saving. Over the last three years, the tax code was amended to lower income tax rates, encouraging people to save more and spend less; to repeal (in a fashion) the estate tax; to significantly lower the tax on investment with faster tax write-offs for new equipment; and to lower the tax rate on both dividends and capital gains.

That's an impressive list for one term, but Bush's proposals for a second term would be even bolder in implementing the neoconomists' agenda. He has proposed to expand tax-free saving accounts in a way that would exempt all of most families' investment income from taxation. Finally, Bush would promote saving by allowing individuals to set aside part of their social security payroll taxes in private accounts that would fund their own, not current retirees', pensions.

Those who like their politics a la Michael Moore or Rush Limbaugh will not get their dose of vitriol from this book. Altman bases his arguments on merits, not motives. He accepts the neoconomists' goal of increasing the growth rate of the economy by stimulating saving and applies basic economic analysis to their arguments. The closest he gets to probing motives is noting that Bush's cabinet secretaries' wealth may have made them more willing to take the risks inherent in this revolution.

Altman writes for non-economists, so he avoids jargon that makes economic policy debates inaccessible to many voters. Although there aren't many exciting ways to describe how different resources are combined to generate economic growth, Altman occasionally turns a colorful phrase: "In the neoconomists' revolution, privatizing Social Security would be as big as bringing Louis XVI to the guillotine." Nonetheless, the book is not especially lively.

And in targeting a broader audience, he doesn't break new ground in the debate over the impact of Bush's policies. His attempt to narrate the economy's performance during Bush's first term necessarily leaves out nuances that many economists -- not just Republican ones -- would emphasize. For one thing, he understates the need for a fiscal stimulus over the last few years.

After giving neoconomists their due, Altman provides his own critique. For the long term, he doubts the plan will work -- the evidence on how behavior responds to changing tax rates is mixed: Higher saving may not translate into higher U.S. investment if the funds go abroad, and rising government deficits may offset any rise in household saving. He thinks that the attention paid to capital neglects other sources of growth, such as education and innovation.

For the short term, Altman often returns to the theme that these proposals were poorly designed for the needs of the economy. "It was like going to the doctor with a headache and ending up with an appendectomy -- well, hey, at least you got some painkillers." (When one's own party acts on long-term plans using short-term problems as an excuse, it's showing tactical brilliance; when the other one does it, there's something a little dishonest about it.) He argues that other measures would have offered more "bang for the buck" to provide a boost to the economy.

Altman focuses on the impact of neoconomics on income inequality. While noting that the United States has "a unique tolerance for inequality," he offers a plainspoken case for concern. Perhaps voters don't want to redistribute income from the rich to the poor, but maybe they should draw the line at an economic strategy that offers substantially more benefits to the well-off. He bases his case less on an appeal to fairness and more on economics: "As long as money mediates access to opportunities, inequality will continue to create economic inefficiencies." He worries about a political backlash against a well-off class of non-taxpayers. "The fortunate and growing minority who managed to receive all their income from stocks, bonds and other securities would pay nothing -- not a dime -- for America's cancer research, its international diplomacy, its military deterrent, the maintenance of the interstate highway system, the space program or almost anything else the federal government did. . . . Broadly speaking, that fortunate minority would be free-riders."

Altman could have strengthened his case that Bush is embarking on radical tax reform by tracing the lineage of Bush's ideas to the flat tax. Thrust into the legislative arena by former congressman Dick Armey, the flat tax was pure neoconomics. Its goals have been Bush's goals -- lowering tax rates and taxing income from capital only once. True to the Republican revolutionary sentiment in the mid-1990s, the flat tax would have implemented neoconomics in one fell swoop. As with most comprehensive tax reforms, it would have created both winners and losers: winners through lower taxes but losers through limiting deductions (in the name of taxing income from capital at least once). The flat tax lost momentum as the Republican revolution foundered after the government shutdowns of 1995-96, but Bush is essentially implementing the flat tax in a piecemeal fashion, not as a comprehensive reform.

Thinking about Bush's tax agenda in the context of the flat tax highlights a challenge and an opportunity for a second term. The challenge is that Bush's piecemeal approach so far involves creating only winners. For example, under the combined Bush proposals Altman describes, many interest payments wouldn't be taxed at all -- companies would continue to deduct them, and few individuals would have to pay tax on the interest they receive. Thus the piecemeal approach doesn't deliver all of the economic gains that comprehensive reform would, and it would create new opportunities to play games with the tax code. If Bush sticks to the principles of conservative tax reform by tackling initiatives that also raise revenues (such as restricting deductions for interest payments), he has an opportunity to lower the budget deficit and pay for some of his other tax ideas. But swallowing a bitter pill is always harder if the sugar coating has been licked off first. *

Tom Gallagher is the head of policy research at the ISI Group, a Wall Street Research firm, and is on the editorial advisory board of Mental Floss magazine.