The Tax Stops Here How this prof made cutting dividend taxes the talk of the town
(FORTUNE Magazine) – The most surprising and divisive part of President Bush's tax plan is his proposal to end the double taxation of dividends. Academics have liked the idea for decades, but Bush, who's no scholar, never even mentioned it until late last year. Today it's the centerpiece of his top domestic priority. How did that happen? The answer is simple and strange: Glenn Hubbard was determined to make it so.
Who's Glenn Hubbard, you ask? At the moment he's an economics professor at Columbia University in New York City, the same place he was in January 2001 before he took a White House post so low profile that it doesn't rate an office in the West Wing: chairman of the Council of Economic Advisors. During Hubbard's short tenure, however, the office became a powerhouse. Not only was Hubbard, as has been acknowledged, the intellectual force behind the dividend idea, but the mousy workaholic also excelled at the political game. While other members of Bush's team feuded, Hubbard maneuvered the President into taking the high-stakes gamble that he's still struggling to win today.
Pale, thin, and soft-spoken, the 44-year-old Hubbard is a prolific authority on how taxes affect corporate behavior. He grew up in tiny Apopka, Fla., the son of English teachers, and earned his Ph.D. in economics from Harvard. On the subject of the double taxation of stock dividends he is a man obsessed.
Last July, when Bush convened his advisors in the White House's Roosevelt Room to talk about the faltering economy, Hubbard could see that the President's economic team was in disarray. Larry Lindsey, Bush's gloomy top economic advisor, was pushing for a massive $100-billion-a-year tax cut. Paul O'Neill, the Pollyanna-ish Treasury Secretary, opposed any tax relief at all. Commerce Secretary Don Evans, the President's close friend, and budget director Mitch Daniels, a deficit hawk, were ambivalent at best. In that confusion the hard-charging Hubbard saw his opportunity.
The meeting was designed to prepare for an economic forum in Waco, Texas, near the Bush ranch. Although the press mocked the seminar-style event as a publicity stunt, Hubbard knew that Presidents, whose time is tightly circumscribed, can be influenced by what they hear on such occasions. So he contrived to have advocates of the dividend exclusion speak there, including brokerage founder Charles Schwab. The tactic worked. The President sat through Schwab's remarks taking notes intently.
Bush told his aides that he wanted to learn more. So later that day, several of them--including Karl Rove and Karen Hughes, Bush's senior political advisors--met in a suite at the Waco Hilton to discuss the pros and cons. O'Neill didn't attend, which gave Hubbard an open field. For the benefit of the political crew, he described how the measure would benefit investors, a fast-growing part of the electorate, by boosting stock prices and encouraging executives to act more responsibly toward their shareholders. He also calmed Daniels by asserting that the proposal didn't have to be as costly as he had feared. On that day, insiders say, the proposal moved from a concept to a live option.
As summer turned to autumn, the economy weakened, markets tumbled, and the momentum for tax relief grew. But Hubbard took nothing for granted. He and the CEA's chief economist, Douglas Holtz-Eakin, produced study after study showing how much the measure would increase the value of the stock market, reduce the cost of capital, boost economic growth, and create jobs. They also anticipated criticisms of the plan and developed concise, jargon-free defenses.
While Hubbard toiled, O'Neill self-destructed, and with him went the strongest administration opposition to a tax cut. The secretary was steadfast in his opinion but stubbornly relied on his own makeshift research instead of the expertise of his extensive staff. He often came to weekly meetings with fellow economic advisors armed with little more than ad hominem attacks, which withered under Hubbard's analysis. O'Neill grew so frustrated with the way Hubbard destroyed his ideas in their infancy that he called Hubbard a "baby strangler." Hubbard, though, found an ally in Lindsey, who made an effective case for the dividend scheme to the President during an Air Force One flight in September.
On Nov. 26, a blustery Tuesday after the mid-term elections, the advisors met in the Roosevelt Room. O'Neill repeated his opposition to a big tax cut, but the others declared their assent. The only question was which taxes would be cut and by how much. Even a 50% exclusion for dividend taxes was considered. But Bush didn't want to go halfway. Although he didn't make final decisions at the meeting, he declared himself a complete convert to Hubbard's way of thinking. "If it's the right thing to do," Bush said, "it's the right thing to do. We should go for it."
That has proved to be a momentous choice. A 100% exclusion doubled the cost of his tax-cut plan, opening him to accusations of fiscal recklessness and favoritism for the wealthy. But Bush has willingly accepted the battle he's facing today with Democrats and moderates in his own party. "The President really must believe in the value of the dividend exclusion, because it's nothing but a loser politically," Daniels admits. "What other explanation could there be?"
One other: Glenn Hubbard got his way.