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.