Wise Compromises

President Bush has backed the House version of his economic stimulus package. The House version would reduce dividend taxes to 15% rather the eliminating them, and would add $30 billion in tax credits to low income families and $20 billion in aid to state governments.

While it would provide greater stimulus to eliminate dividends altogether, the House plan is far more sensible than the Senate version which would halve divident taxes one year, eliminate them for a few more, then reintroduce them later. Such a plan would be an accounting nightmare that would only confuse investors and negate any long term stimulus. It is far more preferable to compromise on the rate of dividend taxation than to play these sort of games that would benefit no one.

Granted, this is a compromise piece of legislation, but politics is often the art of the wise compromise. Bush is right to back the more sensible and politically viable House plan over the deeply flawed Senate version. With these compromises, especially the state aid package, it would be deeply surprising if the bill does not pass.

Critics will argue that this measure will increase the national debt, which is true if one accepts that the economy will remain stagnant. However, the whole point of a stimulus package is to increase the economy, therefore raising tax revenues. The current debt is as nebulous as the surplus of 2000. As the economy moves, so will the debt. The most important thing for policymakers to do is stimulate the economy rather than diverting resources towards paying down that debt. Once the economy is back on track, the revenue problem will be a thing of the past.

ADDENDUM: Brian Wesbury argues in National Review Online that the Senate’s plan is the better plan. In some ways, I agree that removing the tax on dividends would be better, but I’m not sure that corporations would change their behavior unless they knew that the divident reductions would be permanent. Even if Wesbury is right, I still argue that the House plan has the better chance of passing. In the end, sometimes the better policy has to take the backseat to politics in order to be implemented. Wesbury does admit that the House plan, while not optimal, would still help in creating stimulus and simplifying the tax code.

9 thoughts on “Wise Compromises

  1. Wow, you’re in a fairy tale here. Among those who actually study economics (usually a conservative and ideological bunch), there is extremely little support for the idea of a tax cut on stock dividends providing stimulus to an ailing economy. Bush is on his fourth round of economic advisors because he’s had a brutal time finding a yes-man who can endorse such an egregious tax cut plan and still sleep at night.

    Of any avenue a President or set of lawmakers could take to stimulate an economy, studies have shown that a dividend tax cut is dead last on the list of effectiveness. The most effective is said to be extension of unemployment benefits, since those who receive that money will instantly spend it and recycle it into the economy. Every dollar in unemployment benefits generates $1.74 into the American economy, studies show. Comparatively, the dividend tax cut, which pads the savings accounts of millionaire investors, generates nine cents into the economy for every $1 spent. Even members of the Forbes Top-25 list (including #2 Warren Buffett) are attacking the proposed tax cut as unconscionable.

    As erroneous as standard trickle-down ideology is, I would almost welcome the usual GOP push for a capital-gains tax cut instead of this budget-busting boondoggle. At least a capital-gains tax cut has the potential (albeit, slight) to generate a tiny bit of stimulus to the economy. The dividend tax cut does not….at all…period.

    Your lack of concern for the latest tax cut’s effect on our national debt, sandwiched in between your posts about Europe facing impending bankruptcy from retirement entitlements, is laughable. You brush the grossly irresponsible and child-abusive American deficit-spending off through the standard dynamic scoring argument. To whatever extent dynamic scoring is viable, it’s seriously overstated by conservatives. If governments reduce revenue from $10 to $7 with tax cuts, they’d like you to believe the economic growth will INEVITABLY lift that revenue to $12. In reality, even above-average rates of economic growth will be lucky to lift the revenue back to $9. Dynamic scoring has a 20-year history of failing to live up to expectations, and given that virtually nobody who doesn’t receive their paycheck directly from Bush considers dividend tax cuts a viable method of stimulus, it looks as if the streak of failure will last at least another 20 years. Sadly, the joke will be on our children when we send them the bill.

    Lastly, if cutting taxes is so closely related to revenue growth as conservatives constantly say, why is it that all these states facing budget deficits aren’t cutting taxes, as opposed to raising them, to balance their budgets. Considering the GOP always tells us the states know best, it’s too bad the heads-of-state are so clueless about the economic reality that is apparently monopolized by Republicans at the federal level. Curious corner you guys have backed yourselves into with this one.

  2. Is it really the behavior of coroporations that we are trying to modify or the behavior of investors? Corporations can only thrive if people invest. I’m not in complete opposition to a cut in the dividend tax because it is not just “millionaires” who are investing. If a cut could cause a surge in the stock market that would make people feel like thier investments (retirement plans included) were making good returns (not just a one-time surge, I’m talking about a real turn-around) I think it might spur consumer spending, which would then stimulate economic growth. I do not really think that now is the time to make this very large policy change. Yes, the economy could use a kick in the ass, but I cannot help but be blown away when it is Democrats preaching fiscal conservatism and Republicans spending irresponsibly. Wake up!! Reaganomics does not work!!!

  3. The dividend tax cut, at least the original $726 billion Bush plan, would see 85% of its benefits go to millionaires. The nickels and dimes it would put into the average construction worker’s 401K would very unlikely to give him or his neighbors increased confidence as consumers.

    And the Dems being the party of fiscal responsibility is nothing new. The Republicans deferred that role in 1981 when Ronald Reagan forever changed the party dynamic, later ushering in the “Tax Cut of the Month” crowd that would have bankrupted the country 10 times over already if they had gotten their way on every budget-busting tax cut they endorsed.

  4. Tax cuts increase government revenue, which is exactly what happened in the 1960s with Kennedy’s tax cut and in the 1980s with Reagans. Furthermore, growth in the public sector does not fuel greater growth in the economy. Keynesian economics simply does not work. You cannot spend your way into prosperity.

    The best way to increase the economy is to get money flowing into the public sector, and restore investor confidence. Ending or reducing divident taxation will offer a boost in the short term, but in the long term it will also increase the number of companies that offer dividends, providing a long-term stimulus as well.

  5. The standard GOP folly of tax cuts increasing revenue is clever math at best, and an outright manipulation for all intents and purposes. The 1960 tax cut dropped the highest tax rate from 90% to 72%. Even most of us lefties would contend that 90% is an oppressive and counterproductive tax burden. It’s fairly natural that cutting that burden by 20% would promote economic growth. But to use that example as justification for continuing to cut top tax rates year after year after year when they’re already too low to pay the nation’s bills is tantamount to a little kid who likes that first lollipop so much that he keeps eating more and more until he’s sick.

    The 1981 tax cut was passed at the tail end of a lengthy recession, largely prompted by oil shortages throughout the 70’s, that held the entire world in its clutches. Reagan, like Clinton later, was blessed with convenient timing and the ability to accept undue credit for the market upswing that began before he even took his oath of office. Beyond that, Reagan’s 1981 tax cuts were so extreme that emergency tax increases (mostly regressive increases targeted to the working class) were enacted in 1982 to make up for the incredible shrinking revenues. If anything, the extremity of the Reagan tax cuts stalled the economic recovery of the early 1980’s.

    Granted, revenue did go up in the 1980’s following the tax cut, but revenue went up substantially more in the 1970’s and 1990’s. Simple arithmatic proves this point. We hit perennial record deficits in the 1980’s, at a time when spending was not out of line except for the military which Reagan was insistent on showering with money. If revenue really went up in the 1980’s the way conservatives like to make us think it did, why weren’t able to pay our bills in those years? The Hastert-Lott GOP Congress of 1999-2000 increased spending more than any Congress of the 1980’s did, yet they presided over a budget surplus made possible by the fiscal discipline of Clinton who was able to raise revenues.

    Once again, I challenge you to come up with a good answer as to why the 44 states facing budget deficits right now don’t follow the lead of the supply-siders and CUT, rather the increase, taxes as a way of generating all this fairy-tale revenue that conservatives fantasize about? Could it be that all of these Republican governors desperately seeking to increase revenue are simply uninformed about the premise that tax cuts increase revenue? Or could it be that your dynamic scoring argument holds no merit here in the real world?

  6. Some of the larger states could do well to cut taxes in certain areas to increase growth. However, states don’t necessarily have the kind of control over the economy that the federal government does. Especially in cases where state taxes are already relatively low (say in a state like South Dakota that does not have an income tax) the benefits of a tax cut wouldn’t be enough to change most people’s behavior.

    The solution for the states lies in cutting spending and looking to maximize economic growth where they can. Unfortunately for the states, there’s very little they can do as individual states when the overall national economy is in a downslide.

  7. You run Keynesian economic values through the mud in one breath and then suggest that the federal government has control over the mobility of the American economy in the next. To me, that sounds an awful lot like Keynesianism.

  8. Of course the federal government has power over the economy, that’s never in doubt.

    What Keynesian is based on is the concept that the government can spend its way into prosperity, which is a concept that has never worked.

  9. this tax cut like bush’s last tax cut are a joke, a bone to his rich friends so he can get a job when he loses the next term. his last tax cut sucked, and so does this one.

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