Congressional Republicans are now planning to halve taxation on dividents rather than eliminating. GOP leaders are in deep negotiations over details of the President’s proposed economic stimulus package with Democrats and moderate Republicans. It appears that many of the proposed cuts will be reduced or eliminated.
What Congress seems to be doing is taking the easy way out. Tax cuts are not a de facto way of stimulating the economy. Nor are they necessarily a burden to economic growth as the Democrats are arguing. Rather, Congress needs to focus on tax cuts that spur economic growth. However, that means they may have to make some politically risky choices.
The Heritage Foundation has a good description of what a pro-growth tax policy entails. In essence, while it may be politically easy to give child tax credits and $300 handouts, those measures do not produce a climate of economic productivity.
What needs to be considered are tax cuts that remove barriers to economic activity. The tax on dividends creates a negative stimulus to investment, something that drags down the economy, even if only by a small amount. As the Heritage Foundation’s report states:
Economic growth occurs when people work more, save more, and invest more. These are the behaviors that increase national income and boost the nation’s wealth. But not all tax cuts improve incentives to engage in productive behavior. With the total amount of tax relief limited, lawmakers will have to be very selective if they intend to encourage additional economic growth.
A pro-growth policy means that politicians must be willing to support tax policies that encourage investment and productivity. While tax relief is often a good thing, a tax plan that merely hands back money without allowing for economic growth does little to improve the overall economy. It may be politically expedient to give tax handouts, but the needs of economic growth require politicians to act on the interests of a stronger economy and not short-term political gain.