Tax-cut backers offer critics ‘reality check’

Critics of President Bush’s 10-year, $674 billion economic stimulus and growth plan, who claim it will expand the federal deficit and benefit only the rich, need a “reality check,” according to some analysts.

The Bush plan, criticized by the Washington Post as “audacious” and “radical,” needs to be evaluated by the “hard facts” maintain groups such as the Heritage Foundation and Cato Institute.

Supporters of the president’s proposal contend it will benefit all income tax payers immediately and fuel economic growth – both short-term and long-term – by creating more jobs and hence more taxpayers, which would boost federal revenues.

In contrast, top Democrats view the plan as a giveaway to Wall Street and the wealthy that will drive up deficits and hamper chances for recovery. As an alternative, they offer a one-year $136 billion package they say is targeted to middle-class taxpayers and working families.

Senate Minority Leader Tom Daschle, D-S.D., calls Bush’s tax cut “obscene.” After the president’s State of the Union address, Sen. Russ Feingold, D-Wis., said Bush’s economic stimulus plan is “entirely fiscally irresponsible.” Sen. John F. Kerry, D-Mass., claims the president “doesn’t understand what ails our slumping economy and refuses to do the things that will put Americans back to work.” U.S. Rep. Edward Markey, a senior member of the Energy and Commerce Committee, says the Bush plan primarily “stimulates the tax break taste buds of millionaires and corporate chieftans.”

Sen. John McCain, R-Ariz., is one of at least eight Senate Republicans who have serious concerns about the plan, saying, “I would like to see more middle-income, low-income Americans get the benefits of a tax cut.”

The proposal likely will pass the House unscathed, but is expected to face a fierce battle in the Senate. It is now before the Senate Finance Committee, whose chairman, Charles Grassley, R-Iowa, vows to work with Democrats on a bipartisan plan.

Budget buster?

Opponents of Bush’s plan maintain it will drive up the federal deficit, but supporters argue that history is on their side, pointing to Democratic President John F. Kennedy’s tax cuts that led to an economic boom in the 1960s and Republican Ronald Reagan’s plan that spurred unprecedented prosperity in the 1980s and 1990s.

Kennedy’s philosophy was based on what he called “a paradoxical truth that when tax rates are too high the economy will never produce enough jobs or enough revenues to balance the budget.”

The principle, proponents say, is that allowing taxpayers to keep more of their money increases spending, which helps expand the economy, creating more jobs and consequently more taxpayers, which ultimately increases federal revenues.

Economist Alfredo Goyburu, a policy analyst in the Heritage Foundation’s Center for Data Analysis, believes that between 2003 and 2012, the Bush plan will increase the employment level by an annual average of 311,000 taxpaying jobs, raise Gross Domestic Product by an average of $40 billion and increase purchases of business equipment by an average of $32 billion.

Some critics dispute the claim that Reagan’s tax cuts increased tax revenues in the 1980s, but the Heritage Foundation’s Brian Riedl points out that revenues exceeded the 1980 level of $956 billion [in constant 1996 dollars] in eight of the next 10 years, averaging $102 billion higher. He argues that any increase in budget deficits was a result of spending increases rather than tax cut-induced revenue decreases.

Benefiting the wealthy

One of the most common complaints of opponents to the Bush plan is that it will benefit only the “top 1 percent” of Americans.

The non-profit public interest and advocacy group Citizens for Tax Justice contends that “four out of five taxpayers would get no tax cut from Bush’s proposal to eliminate taxes on dividends, one in three would get zero from the entire package, and the median tax reduction is only $289.”

“Why would most people want to endanger important programs, swell both federal and state budget deficits, and hurt our economy for so little in return?” asked the group’s director, Robert S. McIntyre.

But proponents argue that Bush’s plan accelerates tax cuts scheduled for 2004 and 2006, enabling 92 million Americans to keep an additional $1,100 and directly benefiting about 23 million small businesses.

The president’s staff says a working family of four earning $66,619 would get $1,133 in tax breaks under the Bush plan, but just $600 in tax help from the Democratic proposal.

Kiplinger, the personal finance and business publisher, offers an online calculator to estimate how much individual taxpayers would gain from the proposed cuts.

Heritage points out that the plan reduces the marriage penalty for more than 34 million married couples by doubling the standard deduction. It helps reduce the top marginal rate on 27 million taxpayers by enacting the rate reductions in 2004 and 2006 this year and benefits another 41 million taxpayers through the expansion of the 10 percent bracket.

Corporate dividends

More than half of Bush’s plan, $364 billion, is the elimination of taxes on corporate dividends paid to shareholders.

Critics claim that families and individuals who don’t own stocks receive no benefit from dividend tax cuts.

“It will provide a tax cut windfall to the wealthy few while neglecting the needs of working families,” said Sen. Edward M. Kennedy, D-Mass. “Taking advantage of the suffering of millions of out-of-work Americans, the Bush administration is using the recession to justify major new tax breaks for the wealthy.”

A Cato Institute survey points out that the U.S. is one of only three of the world’s 30 developed nations, along with Switzerland and Ireland, that double tax corporate income. Because Switzerland and Ireland have lower corporate tax rates, the U.S. has “the most punitive and anti-growth dividend tax in the industrialized world,” the institute says.

Heritage argues that the U.S. economy benefits whenever anyone, regardless of income level, has more money to save, invest and spend.

Likewise, the tax cuts will benefit everyone, because “when corporate managers have more money to spend they will offer more jobs, and market competition means lower prices.”

The foundation points out that while just 1.2 million taxpayers are in the top 1 percent, more than 84 million Americans now own stocks.

Wall Street economist John Rutledge contends that elimination of the dividend tax could cause stock values to rise by as much as 10 percent.

Stephen Moore, a senior fellow the Cato Institute, explained how the dividend income is taxed twice.

“Dividend income is taxed as corporate income to the business, and then as personal income to the individual receiving the dividend,” he said in an article published by National Review. “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.”

Lawrence Kudlow, CEO of Kudlow & Co. and a National Review financial editor, calls elimination of the tax “a real game-changer.”

“Today we are in a three-year-old trend of below-par economic activity that has in large part been caused by the destruction of wealth, especially business wealth,” he wrote in a National Review article. “As a cure, an elimination of the investor dividend tax would amount to a 30 percent reduction in the tax burden on capital.”

Supporters of the president’s plan argue that instead of a static cost of some $360 billion, the ending of the double taxation of dividends would stimulate the economy to the extent that Treasury revenues would fall by only $102 billion over 10 years.

State shortfall

Critics also have argued that the plan would not provide the cash state governments need amid a fiscal crisis that will force them to cut general services and health care for the poor.

The Heritage Foundation’s Norbert Michel asserts that “the federal government should not send money to state and local governments simply because they are run by fiscally irresponsible politicians.”

He argues that state government budget deficits “do not represent actual spending and receipts; they represent planned spending and receipts. Since many states were planning to increase spending, these cuts in spending cannot represent a cut in existing services.”

The robust economy in the 1990s caused state tax revenues to rise, he explained, but many states did not adjust their planned expenditures during the economic downturn that followed.

“The resulting deficits, therefore, are a result of higher planned spending and lower planned receipts,” Michel said.

Cutting the kids’ allowance

Heritage contends that Americans “do not get their money’s worth for the roughly 40 percent of income that is spent by government – federal, state and local – supposedly on their behalf, or the additional 10 percent or so of income that residents or businesses spend in response to government mandates and regulation.”

“There is only one way to cut government down to size: the way parents control spendthrift children, cutting their allowance,” Heritage insists.

The first step, the group contends, is to make the tax reductions already passed by Congress permanent, bring their effective dates forward and lower the rates further to improve the quality of the already enacted tax cuts.

“But this isn’t just an economic issue,” the foundation maintains. “It’s time the government stopped imposing penalties – or granting preferences – depending on how people get or spend their income.”