FTN - 1/12/03

BOB SCHIEFFER, Chief Washington Correspondent: Today on Face the Nation, President Bush's tax cut. Can the nation afford it?

President Bush says his $670 billion economic plan will create jobs and help the economy. But it will also drive up the deficit. Is that a good idea with a possibility of war with Iraq looming?

We'll ask Commerce Secretary Don Evans and get the Democrats' view from Senator John Breaux of Louisiana.

Then we'll talk politics and the president's agenda with Joe Klein, columnist for Time magazine, and Dan Balz of the Washington Post.

Then I'll have a final word on North Korea.

But first, the president's economic plan on Face the Nation.

ANNOUNCER: Face the Nation, with CBS News Chief Washington Correspondent Bob Schieffer. And now from CBS News in Washington, Bob Schieffer.

SCHIEFFER: And good morning again. We begin this morning with Commerce Secretary Don Evans, making his first appearance on Face the Nation.

Glad to have you, Mr. Secretary.

Joining in the questioning this morning, Dan Balz of The Washington Post.

Dan, glad to have you.

Mr. Secretary, let's get right to it. This administration had a surplus of $237 billion when you came to office. Now that's turned into a deficit of over $100 billion. Part of that because of tax cuts, but most of it, I think, most people would agree because of the war on terrorism, a cost that, I think, many people would be willing to support.

But I ask you that because now you're coming up with another plan to cut taxes that is going to drive the deficit even higher. Why is that a wise thing to do, especially now with the possibility of a war with Iraq, which can only drive the deficit higher?

DON EVANS, Commerce Secretary: Well, because it's going to drive the economic growth of this country higher, not only this year but for future years. It will mean that this economy will be able to grow at its full potential for years to come.

And that's what the president really has to focus on. And when you think about economic growth, you think first about tax cuts and second about controlling spending.

There is a lot of talk about the deficit. Let me talk about that just for a moment. When you think about the level of the federal deficit at this point in time, we run about 33 percent of the total gross domestic product, which is a very manageable kind of number.

The debt service right now on our deficit is at the lowest it has been in 20 years. When you think about a gross domestic product that's growing at $10 trillion a year and think about deficits that are running less than 3 percent of that gross domestic product every year, it's a very manageable kind of number.

But the president has to think first and foremost about what's in the long-term best interest for the general well-being of the American people. And that's job creation, economic growth, and the way you accomplish that is through cutting taxes and controlling spending.

SCHIEFFER: But I'm old enough to remember when conservatives didn't like red-ink spending. You're saying now that this deficit -- and you're talking about a deficit that may go to $300 billion before we get into a war -- and you're saying that's a manageable number.

How high would a deficit have to go to be, in your view, unmanageable?

EVANS: Well, I think you absolutely have to keep your eye on the deficit and where it is. But like I said, when it's running 33 percent or so of the gross domestic product of the country, if it's under 3 percent or so of the annual gross domestic product, when you think again about the debt service as low as it is right now because of the monetary policy in this country today, I think it's a very manageable kind of number.

SCHIEFFER: Dan?

DAN BALZ, The Washington Post: Mr. Secretary, there's been a lot of criticism of this plan in the way that it is seemingly tilted toward the wealthy. One estimate says that millionaires would get $88,000 or $89,000 additional income, whereas people at the $40,000 level would get about a 1 percent increase in their net income.

You've said all week nobody wins unless we all win, and yet you're doing an enormous amount for those at the upper end of the bracket, and for people who pay payroll and Social Security taxes but no income taxes, you're doing nothing.

What's the equity in a plan like that?

EVANS: Well, let me talk about that, Dan. It's a good question. First of all, we're talking about the direct benefits. The indirect benefits are that the whole economy will grow at a much faster pace in the years ahead. That means more for everybody in this country.

But let's talk about the direct benefits. The direct benefit is to 92 million taxpayers, an average of about $1,100 a year, not just this year, but next year and the year after and the year after.

Forty-six million married couples, they'll receive an average savings of $1,700 a year -- this year, next year, the following year. Thirty-four million families that have children, they will receive a savings of $1,500 this year, next year, the following year.

Six million single family moms, $550 this year, next year, the following year and on. And then 13 million of our elderly citizens, they will receive a savings of $1,400 a year, average, this year, next year and the following year.

And then 23 million small-business owners across this country -- the top bracket that you want to talk about are those that are in the higher-income ranges, 79 percent of that goes to small-business owners.

Let me tell you about one of those small-business owners. A friend of mine in Midland, Texas, Jose Cuervas, started a burrito stand in 1979 with $5,000 and a Sears credit card. Twenty-four years later, he has built that little enterprise into six burrito restaurants in the West Texas part of the world. He employs 115 people. He had sales this last year of $4.5 million. Out of that sales, he'll pay the light bill, he'll pay his rent, he'll pay utility, he'll pay for the food he takes to prepare the meals.

But he's got 115 employees that rely on him every day to grow and build that company. And so they're not looking to the federal government, they're looking to Jose for their job security. And so it helps a guy like Jose Cuervas that's running a small business.

This helps 23 million small-business owners. That top bracket, 79 percent of the savings goes to the small-business owners that employ over half of the people in this country. So that is how this wins for -- how it's a nobody wins unless we all win. The indirect benefits are the entire economy will continue to grow and help small-business owners.

BALZ: Let us ask you about the political feasibility of this plan. You had a dozen Democrats support the president's plan in 2001. Three of those are gone at this point. The other nine have had not very good things to say or nothing to say about this plan.

There are at least half a dozen Republicans who have indicated they have serious reservations about one or another elements of this plan.

How are you going to get this passed through the Senate?

EVANS: Well, I hope I'm going to take my business experience up to the Hill and talk about how the economy works and how businesses plan and how families plan and how they need a plan that has some permanency to it and has some certainty to it so they can plan for their future and why the elements of this plan provide that.

That's what this -- the president's proposal does. Not only does 95 percent of it -- more than 95 percent of it is in the form of tax cuts, as well as providing some help for those who are unemployed right now, but it is also some permanency.

And I would say families do the same thing. Families like to sit down and plan their business. And they need to know as they're setting up future education funds or retirement funds for their family, what is the savings not only going to be this year, but next year and the following year and years to come.

SCHIEFFER: Let me ask you one other thing when we talk about the cost of this. As you go up to the Hill, the House majority leader, Tom DeLay, says these proposals are just the floor. They're not going to be a ceiling on tax cuts. He said he may add in a cut on capital gains. Would you be in favor of that?

EVANS: Well, look, Bob, this is a process, and I know it's a process. The president has presented to the American people what he thinks is the best plan for the economic security of this country for this year and years to come. And I'm sure there are members of the House and the Senate...

SCHIEFFER: So you won't rule out more tax cuts?

EVANS: It's a process. You got to go through it. You know, I'm going to get up and sell this plan of the president's as hard as I possibly can. And again, hopefully take, you know, some of the experience I had in running a business for the last 26 years of why this I think is right for the economy at this moment.

SCHIEFFER: I have to ask you also about the heart of your plan. Half of it goes to eliminating the tax on stock dividends. Even the chairman of the Finance Committee, Chuck Grassley, says he doesn't think that there's the votes to pass that. Would you be willing to scale back that?

EVANS: Well, I talked to Chuck about the plan, and he is looking forward to talking about it further. I think he's open-minded. I'm -- you know, we haven't had a chance to really discuss the details of the plan yet. But, you know, I think it's absolutely a key element in the plan of creating the right conditions for this economy to grow, not only this year, but for years to come, which is the role of government.

We don't create the wealth. I mean, the president trusts the American people to create the wealth. All he's trying to do, and what he wants to do, is create the right conditions for them to be able to create the wealth. And that piece of the plan is a critical part of it, because it creates better conditions for capital formation in this country.

SCHIEFFER: Mr. Secretary, I'm sorry, we have to leave it there.

Thanks so much for being with us.

EVANS: Thank you, Bob.

SCHIEFFER: In a minute, we'll talk to Democratic Senator John Breaux about all of this, in a minute.

(COMMERCIAL BREAK)

SCHIEFFER: And joining us now, Louisiana Senator John Breaux, a key member of the Senate Finance Committee.

You heard the secretary of commerce lay out the reasons why he thinks the plan ought to be passed, but my sense of it is, at this point, that the administration simply does not have the votes to pass any component of this plan. What's your analysis?

SEN. JOHN BREAUX, D-LA: I would agree with that, Bob. I mean, right now the plan that's on the table cannot pass the United States Senate. It can pass the House of Representatives probably fairly easily.

SCHIEFFER: Yes.

BREAUX: But when it gets to the Senate, you have to bear in mind the numbers are 51-49. And even in the president's party, there are members who have had significant problems with this proposal.

It's always good politics to propose a tax cut, but it also should be good public policy. And I don't think that it meets that criteria right now.

SCHIEFFER: You supported the president's tax cut the last time around. Can you support this one?

BREAUX: It's important to note that last time I did support it. It was almost a $1.4 trillion tax cut. But conditions were substantially different. We had over a $200 billion surplus. Now we have almost a $200 billion deficit. Now we have Iraq facing us. We didn't have that then. What are we going to do now in Medicare and prescription drugs? That's a big cost associated with it.

So the question is, how can we take this package, make it more modest, make it more targeted to people who are really going to benefit from it? That type of package I think could pass this time.

SCHIEFFER: Dan?

BALZ: The House Democrats have put forward a package of about $130 billion, in comparison to the president's $670 billion. Do you have a number in mind as to what you think is both fiscally responsible and good for the economy?

BREAUX: Dan, I think it has to be more modest. What do we mean by that? Over half the president's package is a so-called dividend tax elimination.

Most dividends are not taxed now. In my state of Louisiana, like we referred to Arkansas, only about 8 percent of the people are even touched by a tax on dividends that are declared.

So that doesn't help a lot of people. So let's pare that down.

BALZ: What would you do in that case?

BREAUX: I think you could maybe make the first $500 in dividends that a person receives tax-free. Everybody would benefit from that.

And then on other earned income, why not just make the first $6,000 of income that everybody earns tax-free? Everybody would benefit from that. It would be particularly helpful to those in the middle and bottom end of the chain who will use that money and actually stimulate the economy.

BALZ: Do you have a view about the proposed acceleration of the reduction in the top income brackets? The president wants to reduce all the brackets and accelerate those changes.

What about the top brackets, would you slow that down?

BREAUX: I mean, the president's package, I mean, about 33 percent of it go to the top 1 percent of the people in the country earning over $374,000 in annual income. And to accelerate that 1 percent in addition to that, I think, is not a good idea. It's much more expensive than we can afford.

The 10 percent bracket, I mean, that would help everybody, including the people at the very top. Bring that forward, give the help to the people who are going to actually spend the money.

I think we can get a package. We're going to have to work together. And I think the White House knows they're going to have to work with us.

SCHIEFFER: I want to get back to the cost of this package, because you heard Secretary Evans say this morning that he thinks these deficits that we used to talk about being enormous, I mean, talking about $300 billion deficits, he's saying that that's manageable. Do you think that's manageable?

BREAUX: What we heard, I think, is something really astounding, in the sense that Republicans have always talked about the size of the deficit, always wanted to get to a surplus. We finally got to a surplus, and now they're talking about a deficit not being that big of a problem.

Well, I think we can work with the deficit that is not too large, but this certainly is reflective of a major change in Republican Party philosophy to say we can live with a deficit.

I think we have to be careful. I don't think we need to do it, particularly at a time when we're facing Iraq. And how much is Iraq going to cost us? How much is Medicare going to cost us? So we have to be more careful, I think, as we develop this plan and send it to the president.

BALZ: One of the issues that the president ignored in his plan is the fiscal plight of the states. There's a tremendous problem in the states in terms of hemorrhaging money this year.

Do you favor a package that includes significant fiscal help for the states?

BREAUX: Dan, it's also a question of what we can afford here. Are we going to increase the deficit? Are we going to borrow money to give money to the states?

I mean, I'm not sure that that is good national fiscal policy for us to say, well, the states have problems because many of them have cut their taxes, so we're going to go borrow money to help out the states, even -- what do we do to the states who have bit the bullet and increased taxes to pay for their services?

I think that we have to be very careful before we start giving out money to the states that we do not have in Washington.

BALZ: But if you have a situation in which we are cutting income taxes and other taxes at the federal level, and states are raising it, won't that wipe out any of the stimulative effect?

And many of those states will have to cut education and health care to people. What's the equity of that approach?

BREAUX: Well, we have to be very careful, obviously, because it could cause problems. The dividend tax elimination will make bonds less attractive, tax-exempt bonds less attractive. That could also hurt the states.

I think a more modest plan here in Washington, and then look to see how we can help the states down the road in terms of their Medicaid needs, I think is very important, it's a real challenge. I think we can hopefully take that approach.

SCHIEFFER: Senator Breaux, one of the sort of what's become Democratic mantra is this class warfare. Do you think this is class warfare that's going on here?

BREAUX: Well, it certainly shouldn't be, Bob. I mean, of course, the upper-income taxpayer is going to get the largest dollar break because they pay the largest amount of taxes. So I don't like the class warfare argument.

But I think an argument based on being more modest, making sure the people who need it the most will get it, is the approach we should take.

SCHIEFFER: All right, thank you very much Senator Breaux for your perspective this morning.

BREAUX: Thank you.

SCHIEFFER: We'll come back in a moment with a roundtable, in just a minute.

(COMMERCIAL BREAK)

SCHIEFFER: And to kick around the politics of all this a little bit, we are joined now by Joe Klein, who begins his new column in Time magazine this week.

JOE KLEIN, TIME Magazine: Good to be here.

SCHIEFFER: Joe, it is nice to have you back and be reading you on a weekly basis. So I'm sure you're glad to be back.

KLEIN: Yes, I have to feed my addiction, you know. There aren't any 12-step programs for political junkies, right?

(LAUGHTER)

SCHIEFFER: Let's talk about this tax cut that the president has just put out. What is really going on here?

KLEIN: Yes, that's a great -- why on earth are they doing this? I think, you know, you're talking about a $10 trillion economy. And all of these tax cuts happened at the margin.

What they're really about is psychology. And I think that what the president is trying to do here is make stocks more attractive, make the stock market go up. And that will have an impact on all the people who have 401(k)s and are really scared about their retirement now. If those stocks go up, they may be more likely to spend a little money.

This is a big gamble, but it's very similar to the gamble that Bill Clinton took in 1993. At that point, he raised taxes in order to send a message to the bond market, by reducing deficits, they would reduce interest rates. He was being fiscally responsible to affect the bond market. Bush is being fiscally irresponsible to affect the stock market. So, you know....

SCHIEFFER: You know, that's an interesting point you raise. And at this point, it is an argument that I haven't heard the administration raise. It may be the best argument for their tax plan at this point

KLEIN: Neither side really wants to say what this is about because it's too abstract. You know, stimulus is concrete. But the, you know, the wing and a prayer that we are going to affect the stock market is far more abstract.

SCHIEFFER: Do you think it is going to be a stimulus, Dan?

BALZ: Well, there's not enough in it the first year for to it have significant stimulus. There is only about $59 billion or $60 billion of this $670 billion plan that affects 2003. And so, I mean, the Democrats' criticism, in addition to the argument that it's too heavily tilted to the wealthy, is that there is no bang in there in the first year when you really need it.

If you listen to the president through the fall as they were actually thinking about this program behind the scenes, he kept saying the economy is fundamentally sound, but we've hit a speed bump. We need something, you know, it's going to need something. And yet they've come out with a plan in which they're really focused, as the secretary of commerce said here a few minutes ago, on the long-term, on growth. They don't even like to use the word stimulus. They called it an economic growth plan, not a stimulus plan.

SCHIEFFER: Well, as you heard John Breaux say, and I must say I agree with him, I think at this point they don't have the votes to pass any component of this plan. But you have to say, it is a bold stroke, and this president is about bold strokes.

KLEIN: Oh, yes, he is, you know, he is -- this week he proposed -- or said he might go with Medicare -- major Medicare reform, market-oriented reform.

I think an interesting thing that's happened here in the past week is that the Democrats have their blood up now. I mean, they're angry about the way this plan looks. They're angry about the judicial nominations that Bush is going to try and push down their throats. They're angry about Medicare reform. They're angry about the war. You know, Bush is attacking on all fronts.

And one prominent Republican said to me, this is about total domination of the Congress. Don't even let them breathe. Karl Rove is saying that this is the second 100 days, and I think that this is the strategy of the Bush administration.

BALZ: One of the things that's different, I think, this time is that two years ago, the Democrats didn't know whether they were a majority party or minority party because it was a 50-50 Senate. They know they're a minority party now, and I think they're going to try to operate as a minority party.

That tends to unify them in a way that they have not been unified, particularly on some of these issues of taxes and budgets, over the last couple of years.

SCHIEFFER: But the other part, can they be unified when you have, what, eight or nine Democrats running for president? And they've already started. Won't that in a way kind of defuse the message, Joe?

KLEIN: Well, yes, especially since a lot of their leaders and a lot of their most eloquent people are going to be out in Iowa and New Hampshire for the next year.

By the way, we are, you know, like midway through the process now. This time next year, we are all going to be in Iowa. And it is going to end very quickly. I mean, over the next couple -- you know, the field is so scrambled at this point, I think that what you look at for the next month or two is who is raising money and where are they raising it from. But boy, there are -- this is the most wide open race we've seen since 1988.

SCHIEFFER: Well, I wouldn't ask any -- put either one of you on the spot to say who you think is going to get the nomination, because I don't -- I mean, anybody, I think, at this point would be a guess. But who do you see as the leading contenders at this point?

BALZ: I think it's hard to say who the leading contenders are. You could say there is somebody like Dick Gephardt, Congressman from Missouri who has institutional support, labor support. That usually is important in a primary. You could say John Kerry, who seemed to have a very good year in 2002. John Edwards had a very good 2001, not so good in 2002. Who knows who is going to be the candidate in late 2003 and early 2004.

SCHIEFFER: What about Al Sharpton? Will he play any role? Because he is clearly running.

KLEIN: The place where he may play a role is in South Carolina, which has a huge black vote in the Democratic primary. And that's going to be a big primary, the one right after New Hampshire, for the Democrats and a real testing ground. You know, it depends on how well he does there.

But I think that what I've seen as I've gone out over the last few months, and maybe you've seen the same, Dan, although Gephardt has a lot of existing strength, people are really kind of interested in the newer names, a lot of the rank-and-file Democrats are interested in people like Kerry and Edwards and whomever else comes in more so than Gephardt and Lieberman.

BALZ: And tomorrow we'll get Lieberman's announcement that he's running to join the field.

SCHIEFFER: One thing's for sure. Those of us who have convinced people to pay us to watch all this happen...

(LAUGHTER)

SCHIEFFER: ... are going to have a lot of fun over these next two years. I think that's for sure.

Let me close with this final word and turn to the crisis with Korea.

In this weird crisis, the weirdest turn had to come this week when the North Korean diplomats got permission to fly to New Mexico and talk with the state's new governor, Bill Richardson.

Not the usual tack, but actually a good sign, I think, in a week when there were not many. Good because North Korea has always done its business through unofficial channels, and Richardson has dealt with them in the past as a trouble-shooting congressman.

Good because it's a sign the North Koreans realize their extortion demands weren't working. Extortion is the centerpiece of their foreign policy. They don't want war; they want money. They're just cruder about it than most.

Now they say they want guarantees we won't attack them. Fine, we can do that, with some guarantees from them. Right after we make sure they understand that we can turn their country into the world's largest bomb crater if they make one move to harm their neighbors or us.

But with the right kind of guarantees from them, we could help them feed their people, so many of whom now subsist on boiled grass and tree bark.

This sort of thing is best discussed in the back channels, which is why the New Mexico meetings could be the start of untangling this mess, even though some New Mexico residents were apparently worried their governor was neglecting state business to deal with the Koreans.

Clifford Keen, a New Mexico real estate investor, told the New York Times, "Who's minding the store while he's making sure we're not getting nuked by the North Koreans?"

I don't know, but I'd guess avoiding nuclear war would be good for a lot of things, even New Mexico real estate.

That's it for us. We'll see you next week right here on Face the Nation.