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Created: April 27, 2003
Latest Update: April 27, 2003
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Backup of The Tax Cut: Whose Is Bigger?
By Sloan, Editor of Newsweek.
SOURCE: NEWSWEEK. May 5 issue
Copyright: Source Copyright: © 2003 Newsweek, Inc.
Included here under Fair Use Doctrine for teaching purposes.

The Tax Cut: Whose Is Bigger?
"Bush taunted dissident Republicans last week about their ‘little bitty’ tax cut and stood on a tank. Talk about phallic locker-room imagery."

NEWSWEEK

May 5 issue — Psst. don’t look now, but the stock market has been on a roll lately. Through Friday, U.S. stocks had risen by $1.1 trillion—12 percent—since March 11, according to Wilshire Associates. Pretty nifty. And even without yet another tax cut from Washington, there’s so much stimulus flowing through the economy that you can practically hear it sloshing. Oil prices are down about a third from their pre-Iraq-war highs, leaving consumers and businesses tens of billions of dollars to spend on things other than energy. There are huge amounts of money still being freed up from homeowners refinancing mortgages and corporations paying lower interest bills. And don’t ignore the federal government’s $300 billion-plus budget deficit. If you remember your Economics 101, the government’s spending more money than it takes in stimulates the economy. In this case, mega-stimulates it.

ALL THIS leads to some questions for our M.B.A. in chief, George W. Bush. The president is on a roll after toppling Saddam, and now he’s adopted the bully-pulpit-on-a-tank approach to fighting for his tax-cut plan. He wants the $550 billion in cuts agreed to by the House, not the $350 billion the Senate has signed off on. Bush is meeting resistance not only from Democrats, but also from a handful of Republicans who worry about growing, gigantic government deficits.

So last week Bush taunted dissident Republicans about their “little bitty” tax cut as opposed to his “robust” one, and stood on an Abrams tank at a factory in Ohio. Talk about your phallic locker-room imagery.

Call me naive, but it seems to me that we should be discussing ideas on their merits, not the relative size of people’s, ahem , policies. After all, the stakes are incredibly high not only for us, but for our children and grandchildren, who will be stuck with the tab for these cuts. Especially if Bush, who’s always playing offense, ultimately gets what he really wants—the whole $2 trillion-plus cut that he originally proposed, which included eliminating taxes on most investment income. All this is on top of the $1.35 trillion tax cut two years ago. The centerpiece of Bush’s current package is ending taxes on most corporate dividends. This $36 billion-a-year cut is supposed to stimulate our $10 trillion economy by sending the stock market sharply higher, reducing companies’ cost of capital and creating an investment boom. Companies will expand employment, people will spend more because fatter stock portfolios will make them feel wealthier, and we’ll march into prosperity arm in arm.

Let’s be sports and assume the dividend cut would boost stocks by 10 percent or so, as Treasury Secretary John Snow says, even though many investors and academics disagree. (This projected boost is based on untested—and untestable—academic theory.) Look around. Stocks are up 12 percent since March 11. You feeling rich yet? Where’s the boom? Has everyone got good jobs? In the long run, higher stock prices might help produce jobs and prosperity, as they did during the market bubble. But many things affect stock prices. The idea that dividend cuts—or any single factor—would permanently lift stocks defies belief.

Bush complains that it’s unfair for investors to have to pay taxes on dividends that they get from corporations’ after-tax profits. That’s so-called double taxation. He’s right, it’s unfair. But lots of other taxes are at least as unfair. Why should some Social Security recipients pay taxes on their benefits when they paid Social Security taxes with after-tax wage dollars?

If you’re into fairness, fix the alternative minimum tax. The AMT, created in 1969 to keep a handful of rich people from totally avoiding taxes, has morphed into a monster that wipes out deductions and credits for even some middle-income families. The AMT bagged 2.6 million taxpayers last year, and if Bush’s tax cuts are adopted, it’s projected (by the Brookings-Urban Institute Tax Policy Center) to get almost 25 million taxpayers in 2006. That’s because the AMT relief in Bush’s tax package expires after 2005. By contrast, a mere 3 million households—those with incomes of $200,000 and up—get 58 percent of the benefits of the dividend tax cut, according to the Tax Policy Center. More than 50 percent of taxpayers would get less than $25

The president has boasted that putting lots of money into taxpayers’ hands in 2001 helped soften the recession. But most of that was the $300-per-taxpayer “rebate” forced on him by the Democrats. He opposes such a plan now. He proposed massive tax cuts during the 2000 campaign, when things were booming, and proposed the same cuts when things tanked. Now he wants more cuts. Maybe I’m just not “robust” enough to get it. But when someone offers the same solution to every financial problem, it’s usually time to put your hand firmly on your wallet. And keep it there.

Sloan is NEWSWEEK’s Wall Street editor. His e-mail is sloan@panix.com.

© 2003 Newsweek, Inc.