Commentary

Tax-Cut Battle Will Be a Winner for the Economy

By Stephen Moore
This article was published in Newsday, Jan. 9, 2003.

President George W. Bush has proposed a $674-billion tax cut to help pull the economy out if its two-year, bear-market rut. In releasing the plan, Bush seemed to be announcing to the nation:

When it comes to tax cuts to energize the economy, size does matter.

He’s right. This bold plan - almost five times larger than the Democratic alternative - is exactly the right fiscal medicine at the right time. Its beneficiaries will be workers, investors, states and cities - all of whom are front-line victims of anemic economic growth rates. The centerpiece of the president’s plan is elimination of the double taxation of dividends. Currently, dividend income is taxed as corporate income to the

business, and then as personal income to the individual receiving the dividend. This can result in effective tax rates on dividends as high as 70 percent. These punitive tax rates, in turn, reduce stock values, capital investment and savings.

John Rutledge, a respected Wall Street economist and a former

Reagan administration economist, estimates elimination of the dividend tax could cause stock values to rise by as much as 10 percent, which is good news for the 85 million American shareholders. Gary Robbins, of Fiscal Associates, says that a dividend tax cut will increase Gross Domestic Product by at least $5 for every $1 of reduced tax receipts. That’s a high economic pay-off. Even the Democratic critics of the president’s plan unwittingly acknowledged the value of this plan when they criticize it for stimulating the stock market. What’s wrong with a plan that raises the wealth holdings and retirement incomes of American stockholders, who now make up almost half of all U.S. households?

The other major feature of the Bush tax stimulus plan is to fast

forward the tax cuts from the president’s 2001 plan. This, too, makes good economic sense.

The phased-in tax cuts in the 2001 tax plan were always of

questionable economic benefit. Would you go to the store today to buy a product if the store advertised that tomorrow the price will be marked down by another 20 percent? Delayed tax cuts delay economic activity and often have exactly the opposite impact as hoped. They de-stimulate the economy.

President Bush would accelerate his earlier tax cut. A majority of

House and Senate members voted for the tax cut two years ago. Why not provide the full economic bang of the tax cut now, when the economy most desperately needs a shot of steroids? Cutting the highest income-tax rates is especially stimulative because roughly two out of every three Americans paying the highest tax rates are small business owners. They are the wealth and job

producers in our economy.

One reason the U.S. economy is ailing is that business investment

has fallen dramatically. Simultaneously the U.S. venture capital industry, which provides the seed corn for new developing 21st-century companies, is almost entirely dormant today. Why the skittishness? Investors don’t see the profit opportunities in new ventures. Costs are too high for new businesses thanks to government meddling; payoffs are too meager thanks to excessive

taxes on capital investment - i.e., the capital gains tax and the dividends tax.

The objective of this plan is to replicate the tax cut successes

of Presidents Ronald Reagan and John F. Kennedy. It was JFK who said that “it is a paradoxical truth that when tax rates are too high the economy will never produce enough jobs or enough revenues to balance the budget.”

Deficit hawks in both parties will no doubt squeal that this tax plan is unaffordable and will run up the national debt. They are wrong. What Kennedy and Reagan

and now Bush understand clearly is that it is the absence of economic growth that causes runaway budget deficits.

So let the class-warfare Democrats embrace small and impotent

policy changes - changes that increasingly sophisticated investor-class voters will immediately identify as fraudulent. The obstructionist Democrats have announced that they intend to fight against the president’s genuine Republican growth package and to wage all-out class-envy warfare. Bush has 90 million investor-class Americans on his side who realize that tax-rate cuts mean higher stock values and greater retirement security.

Republicans must not shrink from the battle. Bring on the fight.

Stephen Moore is a senior fellow at the Cato Institute.