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The Punch of The Package
The dividend tax cut must survive.


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Stephen Moore

The word on Capitol Hill is that the two chief Republican tax writers, Bill Thomas in the House and Chuck Grassley in the Senate, are ready to chop the president’s dividend tax cut in half. This is said to be necessitated by the vote in the Senate last week to trim the size of President Bush’s bold tax-cut plan. But the dividend tax elimination must remain intact. The most pro-growth element of the president’s plan cannot be thrown overboard.

The better solution for Republicans in the Senate would be to put substantial pressure on the four Republican turncoats — Chaffee, McCain, Snowe, and Voinovich — to agree to a tax cut that is large enough to actually stimulate growth. Such a cut must include the dividend piece.

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Last week’s vote was not the big tax-cut setback that the media has portrayed it to be. President Bush’s tax cut still has political momentum. In fact, it is significant that a majority of Democrats voted for a $350 billion tax cut to give the economy a burst. Clearly, tax cuts are coming, and now the two parties are simply haggling over price.

The worst move for the Republicans would be to capitulate to the left arm of the party and eviscerate the tax cut. The economy needs strong growth stimulation immediately. A scaled-back tax cut without the dividend tax elimination has little value.

With every passing day there are further flashing signs that the limping economy desperately needs this tax-cut stimulant. With consumer confidence recording its fourth straight month of negativity, the stock market bears still growling with discontent, and the manufacturing sector still bleeding jobs, a tax-cut stimulus would provide the U.S. economy with the kind of adrenaline rush that a 3-oint shot does in the waning minutes of a tied NCAA basketball game during March Madness. Tax cuts clear away barriers to new job creation and new business investment. This economic growth strategy worked for John F. Kennedy in the 1960s; it worked for Reagan in the 1980s; and it will work again for Bush today.

So why the temporary setback in the Senate? George Voinovich of Ohio, one of the four Senate Republicans who bucked his own party on the tax vote, said taxes should not be cut during a time of war. Nonsense. The best way to assure victory in this war against terrorism is to stoke the fires of America’s powerful engine of economic growth so that it runs again on all cylinders.

This is precisely the strategy that Reagan used to win the Cold War. We triumphed against the Soviet Union thanks to a combination of vast military and economic superiority. The goal of the terrorists is to disable the U.S. economy. Pro-growth tax cuts are a powerful defense mechanism to foil this strategy.

The top Senate Democrat, Tom Daschle, complains that the Bush plan will blow a grenade-sized hole in the budget deficit. Deficit spending is indeed a big problem in Washington these days. But it is the absence of speedy economic growth (such as we enjoyed in the 1980s and 1990s) that has thrown the budget into severe imbalance. Without American small businesses making profits, and without decent-paying jobs for unemployed workers, how in the world does Daschle think Americans will generate the tax revenues to balance expenditures and receipts?

Growth and expenditure restraints are the keys to eliminating red ink on Capitol Hill. If president Bush’s tax plan increases economic growth by just 1 percentage point a year, and if federal expenses are cutback to the rate of inflation, we will have a balanced budget by the year 2006 and a $100 billion surplus. Even in Washington that’s a lot of money.

This brings us back to the crown jewel of the president’s tax plan: the elimination of the dividend tax for owners of stock. This is more than half of all Americans. Larry Kudlow estimates that just this one provision would increase stock values immediately by 5% to 15%. That boost to the stock market would increase the net worth of American families by between $500 billion and $1 trillion.

The Heritage Foundation economic-forecasting model says that the president’s tax plan creates 3 times as many new jobs as the Democratic alternative in the Senate. If the tax cut’s price tag needs to be trimmed, the dividend piece should be left intact. Throw other items in the package over the side of the ship. The dividend cut alone will deliver the most new jobs and send the strongest jolt of electricity through the moribund stock market.

The White House said again this week that the president will not compromise on his tax plan if the alternative means more jobs lost and less economic growth than America is capable of achieving. And that is exactly what the alternative means.

Tom Daschle and other Democratic obstructionists in the Senate have only won the first round of this 15 round high-stakes prize-fight. My money is still on President Bush prevailing in the end, if only his party will follow him.

Those in his party who don’t are not real Republicans and should be primaried the next time they are up for re-election.

— Stephen Moore is president of the Club for Growth.



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