Advantage, White House
Bush must now apply his popularity to the full dividend tax cut.


Stephen Moore

The Hotline reports that White House sources say they will “take the largest tax cut they can get, and declare victory.” Ugh. A small tax cut (as Senate moderates are demanding) without a dividend deduction won’t stimulate the economy. That would be no victory at all. With President Bush’s popularity soaring due to the recent successes in the war, now is the time for the White House to fully press its advantage on the domestic economic policy front and insist on full funding of the dividend tax cut.

President Bush is winning this fight.One of the Republican malcontents on taxes, George Voinovich of Ohio, has suggested that he might support the president’s tax plan if it is paid for by cutting more government spending. Great idea. After a two-year, $250 billion spending splurge on Capitol Hill, a time-out on new spending until the economy improves makes a world of good sense. Now, if Olympia Snowe of Maine can be made to come over from the dark side, Bush will have the votes to resurrect his tax plan.

What is essential today is that the White House not allow the RINOs (Republicans in Name Only) in the Senate to eviscerate his tax plan. The two pro-growth measures contained in the president’s tax plan are the marginal rate cut and the elimination of the double taxation of dividends. They must be preserved if this tax plan is going to create jobs and growth before the end of next year.

Eliminating the double taxation of dividends will have an immediate and dramatic effect on the stock market because the value of any stock is the discounted present value of the after-tax earnings of the company. The reduction in the dividend tax increases after-tax earnings and therefore raises the value of shares of stock. Hence, the positive boost to the stock market from the dividend cut should be immediate and substantial — perhaps a $1 trillion increase in valuation according to some studies.

It’s hard to imagine any other tax cut that would produce that kind of bang for the buck.

So, if the tax-cut price tag must be reduced from the original White House plan, the adjustments in the child credits and the marriage-penalty provisions should be delayed or adjusted. Leave the dividend cut alone.

The marginal income-tax rate cut from 39% to 35% is the other powerful pro-growth element of the president’s plan. Most remember the economic engine that was powered by Reagan’s marginal-income-tax rate cuts of the ’80s. Interest rates, inflation, and unemployment fell dramatically. Fifteen million new jobs were created. And the economy grew at a healthy 3.5%.

To accommodate both these tax changes, Republicans must not settle for a tax cut of less than $550 billion over 10 years. Realistically, that is the minimum required to provide a real stimulus to an economy that will produce an estimated $150 trillion in GDP over the next decade. A tax cut of smaller size would do little to fix what ails the economy.

One final political point. Pro-growth Republicans must not come down from the moral-high-ground position that the double taxation of dividends is fundamentally unfair and anti-growth. It is our ability to stand high on that principle that makes 100% deductibility of dividends a political and economic winner.

Keep fighting. The pro-growth side is winning.

— Stephen Moore is president of the Club for Growth.