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April
10, 2003 7:00 a.m.
Advantage,
White House
Bush
must now apply his popularity to the full dividend tax cut.
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 he
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.
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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.
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