W, The Sequel
Another Bush term is likely to mean lower taxes, a fatter deficit and a stock market that's more volatile than you might think
(MONEY Magazine) – President Bush's narrow electoral victory and popular majority ended the uncertainty that had helped keep the stock market on hold for much of the past eight months. While there's much we don't know about his second-term priorities, Republican gains in the Senate and the House will give Bush greater latitude to make his tax cuts permanent and to push pro-business policies despite ongoing concerns about the deficit. How will all this affect your pocketbook? Glad you asked.
Will Bush keep cutting taxes? He did it in 2001, 2002 and again in 2003, lowering marginal rates and reducing taxes on capital gains and dividend income. But many provisions start expiring within the next few years, and the estate tax will return to its pre-2001 top rate of 55% in 2011. Throughout the campaign, Bush vowed to make all the elements of his cuts permanent, even though the bill could run as high as $2 trillion over the next decade. With significant Republican gains in both houses of Congress, he'll probably have some success. But even then your taxes may creep up. That's because the alternative minimum tax snares more people every year (especially since regular tax rates have fallen), and the most limited fix would cost at least $450 billion over the next decade. Look for Bush instead to try to polish off the estate tax, a change favored by small business owners.
Is he going to change Social Security? Like any politician, Bush knows better than to do anything to reduce benefits. During his campaign, he proposed a new type of personal retirement account for younger workers that could one day replace Social Security. Full privatization would require so much additional borrowing and offer Democrats so much opportunity to grandstand that Bush may focus instead on that model program.
How is health care going to change? A Bush administration innovation just now becoming available to consumers is the health savings account, which combines a high-deductible health insurance policy with a tax-free savings vehicle for health-care costs. (See "Are You Ready to Own Your Health Care?" in our November issue, available at money.com/ownhealthcare.) The accounts offer more flexibility and freedom to choose doctors, and you can expect the Bushies to flog them heartily—and corporations to adopt them with some enthusiasm to control their own costs. There's just one problem: Since it's impossible to predict all your future health-care needs, you could end up paying more.
How will the economy fare? Bush's unabashedly pro-growth philosophy is a plus. But Presidents don't have ultimate sway over the economy—witness the anemic rate of job creation during Bush's first term despite tax cuts and increased government spending. High oil prices, turmoil in the Middle East and a $413 billion deficit (for the fiscal year just ended) impeded the recovery in 2004. A continuation of those problems in the second Bush term could keep economic growth fairly modest.
What can Bush do for the stock market? Wall Street celebrated Republicans' across-the-board gains. Ultimately, though, the stock market answers to profits, not to the occupant of the Oval Office. So Bush will need a little help from oil prices (lower) and economic growth (faster). But that's not all: If the Republicans interpret their gains as a mandate for further big tax cuts, a growing deficit could undermine the recovery before the end of Bush's presidency. On the other hand, a traditionally conservative focus on controlling spending and reducing the deficit could fuel the recovery and propel the Dow to 12,000 or more before the end of 2005.