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to Political Commentary Introduction
Dividends
& Deficits
A Look at President Bush's Tax Cut PlanCommentary
by Russell Newquist
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In an attempt to stimulate our weakened economy, President Bush proposes a sweeping collection of tax cuts. The heart of his plan, a total elimination of taxes on stock dividends, is highly controversial. Democrats blast the plan for adding to the federal budget deficit while providing a windfall for the wealthy. Republicans praise it for eliminating double taxation and stimulating the economy. As usual, the reality is lost in the spin. The
Budget Deficit
It seems that budget deficits have become the issue for the minority party, whatever it happens to be. Throughout the early nineties, the Republicans harped on the deficit as a primary issue. Now, the Democrats have rallied behind it. Despite the flip-flops, it is an important issue. Our projected 2003 budget deficit represents only 2.3% of our total economy, even though it sets a record for its dollar amount. However, our total federal debt accounts for 61% of our annual GDP. Even this is worrisome only because it keeps growing. http://www.cbo.gov/showdoc.cfm?index=4160&sequence=0 http://www.publicdebt.treas.gov/opd/opdpdodt.htm http://www.publicdebt.treas.gov/cgi-bin/cgiwrap/~www/opdpen.cgi http://www.bea.doc.gov/bea/newsrel/gdp402f.htm Our huge federal debt is largely a result of an irresponsible Congress – on both sides of the aisle. No Congressman or Senator wants to go on the reelection trail announcing that he voted against pork barrel packages for his home district. So we keep spending more and more, even when we don’t have to. President Bush loves to point this out when Democrats blame his budget for the deficits, but he’s done little to help the situation. Even his budget grew federal spending by 4% for 2003. http://www.cagw.org/site/PageServer http://www.whitehouse.gov/omb/budget/fy2004/ Our government has plenty of money to meet its needs, but it wastes it on useless or inefficient programs. Although Bush’s tax cuts carry their share of responsibility, blaming them for the deficit is a total copout argument by the Democrats, as is using them as an argument against the President’s dividend tax cut. However, because the cuts will cost hundreds of billions of dollars, the deficit is an important factor. http://www.whitehouse.gov/news/releases/2003/01/20030107.html A
Windfall for the Wealthy
Democrats also blast the dividend tax cut because it gives large tax breaks to the wealthy but offers nothing for lower income taxpayers. They are 100% correct, but this argument is a red herring. It presupposes that helping the poor is our only goal with tax relief. The stated goal, however, is economic stimulation, and helping the poor, or even the average consumer, is not what our economy needs right now. http://www.aflcio.org/yourjobeconomy/ns01132003.cfm Consumer spending remained high and even increased throughout our entire recession and into the slow recovery. Our economy is suffering because businesses are having trouble. The primary cause is a drop in business investment. Giving huge tax cuts to the poor and middle class will not cause businesses to spend more, will not create new jobs, and will not ease our current economic troubles. Any serious student of economics will completely ignore this line of reasoning and focus on the relevant aspects of the bill. http://www.bls.gov/cex/csxann01.pdf http://news.bbc.co.uk/2/hi/business/1048402.stm Double Taxation The Republicans aren’t innocent either. The double taxation issue is another red herring. Again, they are 100% correct – a dividend tax double taxes corporate profit. But they don’t tell you that every single dollar in the American economy is taxed multiple times. http://www.globalaging.org/pension/us/private/senior.htm http://slate.msn.com/id/2069202/ When you get your paycheck, Uncle Sam takes his portion in the form of an income tax. Depending on where you live, your state and city probably also take a cut. When you spend that money, your state and local governments probably charge you sales tax on your purchases. When the store you shop at makes a profit from the sale, the government takes out corporate income taxes. Finally, when that store pays its employees, the cycle starts all over again with income taxes. It’s awful. Uncle Sam taxes your same dollar four times before it gets into the hand of the poor guy behind the counter. But the stink of it is, there’s no better way to do it. There is neither a logical nor a fair way to exempt anybody from the cycle. Whom should we exempt? Why? What are the criteria? Any system would require a rule book the size of a phonebook to document it all. I think our tax code is complicated enough, thank you. Ignore the double taxation argument; it, too, is irrelevant. http://www.fourmilab.ch/ustax/www/contents.html Economic Stimulation Republicans mainly argue that eliminating the dividend tax will stimulate our economy. The thought is that it will encourage new investment and raise the stock market value. In reality, the stock market will probably simply readjust. Companies that pay dividends will likely see their stock prices rise, while others will see their stock prices fall. The net effect will likely be close to zero. http://www.inc.com/articles/finance/pers_finance/pers_finance_basics/25357.html Changing
Corporate Behavior
The dividend cut will not provide the short-term economic stimulus that the Bush Administration claims it will. But in the long term it would have a strong, though indirect, impact on our economy. Eliminating the dividend tax will encourage more companies to pay dividends. This is a good change for corporate America. It is easy to hide poor performance behind corporate accounting. Companies can’t fake dividend payments. http://www.nationalreview.com/kudlow/kudlow031003.asp This will help restore confidence in the stock market. But it will also improve the way corporations operate. Over time, this improvement will help lead the corporate world to better growth. Corporate growth means new products, new services, and new jobs. This is a strong argument in favor of eliminating the dividend tax. But is it enough to offset the cost? Two years ago, I would have said yes. However, with our current budget deficit projections, I am far more cautious. The President’s plan is good in the long term, but the cost is high in the short term. We already have short-term fiscal trouble, which is a strong argument for postponing it. But there is a better idea in the works. The White House has indicated willingness to phase in the elimination over a period of years. This is an excellent compromise. It gives us all of the benefits, many of them immediately, while defraying the cost until we can afford it more easily. Hopefully Congress will realize this as well.
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