There’s a view circulating that President Bush devoted only one line of his State of the Union speech to the dividend tax cut because he’s not serious about pushing it. This is incorrect. White House sources confirm that the president and vice president are set to rally the troops for the entire economic-growth and tax-cut package.
And well they should. This package is a direct appeal from the White House to the investor class — arguably the most powerful voting block in the nation and surely the key group for reigniting the stock market confidence that is so essential to more rapid economic recovery. Much like Reagan, Bush sees tax policy through the eyes of taxpayers, not government revenue grabbers.
Even more, the president believes strongly in the principle that corporate profits should be taxed only once, not twice. That’s why he took this bold action. As the vice president has said, the Bush-Cheney team is conviction-driven by principle.
Will the tax-only-once strategy hold up as Bush outlined it? That’s still to be determined. House Ways and Means chairman Bill Thomas holds the view that double taxation should be abolished at the corporate end, rather than the investor end, by excluding both dividends and interest as expenses. In economic terms there is no difference which end eliminates the double tax — as long as it’s eliminated. But the decision to exclude investors from dividend taxation is sexier. It also helps make up for the huge losses that the plunging stock market dealt shareholders in recent years.
That said, look for the White House to stick to its guns. Two years ago both Thomas and Charles Grassley, head of the Senate Finance Committee, were doubtful starters on the original Bush income-tax cut. But with pressure from the White House and the Republican leadership in the Senate and the House they came around to support personal rate reductions. Both should come around to the abolition of the dividend tax on investors.
Bush’s commanding State of the Union speech laid out clear markers on economic growth via broad-based, permanent tax cuts. He also left little doubt that he intends to remove Saddam Hussein and his henchmen by military means. To a great extent more clarity on Iraq will help lift the fog over the stock market and the economy. But the president and his staff know full well that additional supply-side tax cuts in favor of capital formation and risk-taking are necessary to ignite the stock market and boost economic growth to the point where job creation resumes and unemployment starts falling.
If the economy a year from now is as soft as it is today, with the stock market equally unimpressive, Republican control of Congress will be in jeopardy, and Bush’s re-election bid might even be threatened. The Bush high command is fully aware of this.
That is why they will push hard to implement their entire tax-cut package, which now looks even beefier. This week, it was revealed that the package also includes an expansion of Roth IRA supersaver accounts. These accounts — after-tax deposits to be invested as savers see fit, and never to be taxed again — would be universalized under the Bush plan, permitting investors penalty-free withdrawals for education, healthcare, housing, or retirement. More supersaver-type accounts will move the country closer to a consumption-based system where saving, investment, and capital are not double-taxed.
Democrats, of course, are asleep on all this. They still believe stock owners are super rich when in fact the investor class moved to Main Street years ago. By standing against tax cuts, they say they want to protect federal and state budgets. They call this “national saving.” But this saving is only in the eyes of government workers. Private-sector investors, those who view life from the taxpayer standpoint, are more interested in the government tax bite on their own savings accounts.
This difference is crucial. On one side, Democrats want government to be in surplus. On the other side, Republicans want taxpayers to be in surplus, so they can save, spend, and invest more. The time-warp Democrats are still defending government bureaucracy, while the Bush Republicans are protecting the earnings of the investor class. It’s a huge difference.
Come election time, American taxpayers and investors will remember who to thank. Not only will the Bush approach generate crucial business capital and spur faster economic growth, it will also lock-in Republican gains for years to come. While the Democrats are asleep at the switch, the Bush Republicans are about to steal a huge chunk of the electorate. It could be the biggest political heist in a hundred years.
— Mr. Kudlow is CEO of Kudlow & Co.