President Bush’s critics wasted no time denouncing his latest economic plan. “An irresponsible, ineffective, ideologically driven wish list,” is how Sen. Joseph Lieberman put it. “Too steeped in conservative ideology,” the Washington Post said. The president is “going for broke — as in flat broke,” according to the Los Angeles Times.
Once you look closely at the plan, however — and the economic benefits it likely would produce — you come away with a remarkably different impression.
Let’s consider two main features of the president’s plan:
1. Speed up and make permanent the 2001 tax cut. No wonder the critics are upset. This change would rob them of a handy rhetorical club — the charge that we can’t expect this tax proposal to do much good when the last one has done little to boost the economy. But how could it, when most of its tax-rate changes won’t take effect until 2004, 2006, and even later? And how much growth can it spark when the entire package is set to be repealed in 2011?
In short, the critics are blaming a sluggish economy on a tax cut that, in large measure, has yet to materialize. If we implement the whole package now, we can begin enjoying its intended benefits — higher levels of saving and investment, more jobs — sooner. And the benefits will be widespread: The 2001 tax cut lowers every single tax rate, from the well-off to the not-so-well-off. If you pay taxes at all, your take-home pay will rise.
Tax-cut opponents insist that tax cuts will depress the economy. But they ignore historical evidence that shows how tax cuts help the economy. It happened in the 1960s, when President Kennedy’s plan to cut the top marginal tax rate from 91% to 70% took effect. Total tax revenues climbed 4%, despite predictions that the plan would plunge the country into debt. Taxpayers got higher post-tax incomes and expanded economic opportunity. The government got a faster-growing economy, more people working, more taxable earnings per worker and, thus, more revenue.
2. Eliminate the double-taxation of dividends. Basic fairness dictates that we tax income only once. Yet after corporations have paid taxes on the dividends they pay to investors, the government returns for another hit. This money is subject to another tax — this one paid by the investors. In practice, this means the government can end up pocketing more than 50 cents of every dollar of distributed corporate profit.
But more than fairness is at stake. The double taxation of dividends may also encourage companies to engage in the shady practices that have led to so many high-profile bankruptcies. The reason: Investors don’t want to pay the dividend tax, so they seek out companies that finance new investment with debt instead of equity. Inevitably, we saw with Enron and others, some companies stretch themselves too far and collapse, dragging innocent stockholders with them.
Critics claim that a dividend tax cut would benefit only the rich. They don’t seem to realize that investing in the stock market has become far more widespread in recent years, with 84 million people — representing nearly half of all American households — owning stock. Investment tools such as 401(k) plans and individual retirement accounts (IRAs) have thrust millions of Americans who make $60,000 or less per year into the “investor class.”
Perhaps most importantly, the re-composition of investments would produce higher levels of overall economic efficiency. Lower capital costs and more efficient equity and bond markets would give our economy long-term growth, as well as short-term “stimulus.” Research indicates that by eliminating the double-taxation of dividends:
Gross domestic product (GDP) would grow by an average of $32 billion more per year. GDP will be at least $22 billion higher next year and about $45 billion higher in 2012. Total employment would be higher in each of the next 10 years if dividend taxes were reduced. By 2012, the economy would have 325,000 more jobs than if the tax remained unchanged.
Personal savings will increase by an average of $18 billion over the next decade.
“If tax relief is good enough for Americans three years from now, it is good enough for Americans today,” President Bush said as he presented his economic plan. He’s right. And if lawmakers adopt the kind of tax changes he’s proposing, it’s clear that economic growth will follow — today, three years from now, and beyond.
— William Beach is the director of Center for Data Analysis at The Heritage Foundation.