Politics & Policy

A Very Clear Choice On Taxes

The Democrats and Bush are worlds apart.

While America’s two major parties have established much common ground on a number of issues in recent years, the competing tax plans offered this week by House Democrats and President Bush give the nation a very clear choice on tax policy.

The president has presented a tax plan that is welcome news for ailing financial markets and will help jumpstart the economy. But it will also foster growth over the long-term and make the tax code fairer.

The cornerstone of the president’s 10-year, $674 billion plan is elimination of the taxes that shareholders pay on dividends. What Bush is actually doing is eliminating a tax on money that has already been taxed previously (through government’s levies on corporate income). If it sounds nonsensical and unfair to tax this money twice, you’re right — which helps explain why most other developed nations don’t do it.

Up to 35 million American households receive dividend income and will thus benefit directly. But the indirect economic benefits — stemming from a boost in the stock market — could be even more significant. Bolstering stock portfolios will add to Americans’ net worth and help restore consumer confidence, in turn increasing purchasing. And a positive jolt to the stock market will lead to business expansion and thus job creation.

The president’s plan also speeds up the previously enacted reductions in marginal income-tax rates. Government cannot create wealth or expand the economy — only the private sector can do that. Government can, however, hinder economic growth through bad policy, and there are few policies that do more economic damage than high marginal income-tax rates. Lowering marginal rates removes barriers to work and investment and means higher economic growth.

By contrast, the plan of the House Democrats is mostly handout economics. The centerpiece is a $300 one-time rebate to every taxpayer. At most, this will stimulate a small amount of demand over the short-term.

The Democrat plan also rewards states for their extravagant spending of recent years by offering $31 billion in charity. The message from the Democrats here is that while tough economic times have required small businesses to prune back expenditures and employee benefits, the same principle shouldn’t hold true for states, many of whom lavished public employees with higher salaries and generous new benefits during the fat years of the late 1990s.

The House Democrats have offered some small-business incentives, and they also propose to extend unemployment benefits, as does the president. But their scheme does nothing to remove economic disincentives — like high marginal tax rates and the double-taxation of dividends — from the federal tax code, and so offers nothing for the longer term.

The class-warfare crowd has already begun savaging the president’s plan. Ignoring the fact that more successful Americans already pay not only more dollars in taxes, but also a far higher percent of their income in taxes, they claim that the president’s plan is unfair because those sending more to Washington in the first place get more dollars back. It’s the same old tired rhetoric that didn’t resonate particularly well at the polls in November 2002.

In fact, an honest assessment of “fairness” would show the president’s plan as the clear winner. Bush doesn’t unfairly reward state governments for their profligacy of recent years. Unlike the Democrats, he ends a tax on money that’s already been taxed. And his plan is based on the idea of returning tax dollars in some relation to how much a person paid to begin with.

Many conservatives in Congress instinctively shy away from the Left’s “fairness” attacks. Who wants to be in the crosshairs of the editorial page of the New York Times? Hopefully, during the coming debate over these two competing plans, conservatives will shed their past reluctance to take on this fight and instead start telling the American public which plan is really fair.

— John Berthoud is president of the National Taxpayers Union.


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