Neoconomy: George Bush's revolutionary gamble with America's future Daniel Altman PublicAffairs, 290pp, £18.99 ISBN 1586482297

It is often said that only two things in life are certain: death and taxes. Fitting, then, that in most developed nations you cannot have one without the other. Inheritance taxes are a fixture in the west, funding public services without discouraging economic activity - because no one can put off dying for fear of the taxman. In 2010, however, under current legislation, the US will abolish inheritance tax altogether, allowing the rich to hand down assets between the generations tax-free.

Inheritance tax is not the only duty on accumulated wealth that the Bush administration has targeted: over the past four years, it has cut capital gains assessments by 25 per cent and dividend taxes for the top earners by 62 per cent. The left has howled about the regressiveness of Bush's tax cuts, and fiscal conservatives have moaned about the spiralling deficits the cuts have caused. But what is truly revolutionary - and insidious - about Bush's fiscal reforms is not the upward redistribution of wealth, but the huge shift of the tax burden from capital to labour.

The New York Times reporter Daniel Altman has compiled a brief but startling account of the Bush administration's stealthy efforts to bring about a "neoconomy": a society, that is, in which all saving and wealth is untaxed. Altman traces the genesis of the neoconomists' philosophy back to the Reagan era, when the belief grew that America's paltry national savings rate must be increased sharply if the US was to remain the global economic leader. Encouraging people to save, it was claimed, would spur short-term growth and, by encouraging innovation, might augment long-run growth.

It can indeed be argued that it is sensible to aim to generate more capital for investment by increasing saving. However, encouraging wage-earners to save more is one thing; increasing the returns to wealth is another. Moreover, Bush passed the cuts at the one point in the economic cycle when people should be encouraged to save less and spend more - during a recession. The president sold the cuts as a Keynesian short-term stimulus package to end recession, but in fact they could prolong it.

Altman's book becomes truly scary when he considers the sort of society that could result from the Bush administration's fiscal policies. In a full-fledged neoconomy, where only income would be taxed, people would be likely to work less and spend more time managing their stock portfolios; this would slow growth. To lure reluctant employees, companies would pay workers with bonds or dividends rather than taxed income. But as most people would not be able to afford to receive a quarterly pay cheque, only the already wealthy would be able to take advantage. Eventually, the tax base would shrink dramatically: Altman estimates that 18 per cent of tax revenues would "vanish". To recoup these losses, marginal rates on those workers who could not be com- pensated in securities, such as unionised labour, would have to rise. The cost of taxation would be borne by an ever smaller group of workers paying ever higher taxes.

As Altman writes, "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 programme or almost anything else the federal government did." Such a situation "would recall the feudalism many of the first Americans were trying to get away from when they left Europe".

He is right: Bush's fiscal policies are quietly feudalising a country founded on social mobility. The Democratic vice-presidential nominee, John Edwards, was one of the first to criticise Bush's "war on work", describing it as "a plan to corrupt the American economy and shrink the winners' circle". Inexplicably, however, Edwards dropped this compelling and nearly irrefutable line of attack once he signed up to the Kerry campaign. Altman has provided a valuable service by putting it back in the spotlight.

Dan Rosenheck writes for the Economist

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