The Bush administration may have a better case for its tax cuts than the one it has been emphasizing in its sales pitch. But it is an argument President Bush seems gun-shy about making.
In the back-to-back speeches he gave last week, putting public pressure on Congress to pass a jumbo-size tax package, the theme was: Do it for the workers. By my count, Bush talked about work, workers and jobs 18 times in Little Rock on Monday and 30 times in Washington on Tuesday.
He told the business leaders in Washington that his goal was to add 1 million jobs by the end of 2004, which would make up more than one-third of the 2.7 million jobs lost since he entered the White House.
Once in each speech, Bush uttered the words “wealth effect.” Many economists believe that ending the double taxation of dividends, the heart of his tax proposal, will mean “the [stock] markets will go up. . . . The more people feel they got wealth in their portfolios, the more likely it is they’re willing to spend,” he said in Little Rock.
What is intriguing is that two strong advocates of the Bush plan I interviewed last week, one a senior White House official (who declined to be quoted by name) and the other Richard Rahn, the former chief economist of the U.S. Chamber of Commerce, both laid more emphasis on the “wealth effect” than on any other aspect of the president’s strategy.
Rahn was almost dismissive of the parts of the Bush package tailored to working families: the acceleration of scheduled reductions in income tax rates, the end of the so-called marriage penalty and the $400-per-year increase in the child credit. The economic stimulus of such changes, he said, would be negligible.
The White House official was less scornful of such sweeteners, which occupy a large part in the president’s rhetoric and are included in the bills taking shape in both the House and Senate.
But he too said that the big wallop would come from easing or eliminating taxes on dividends. Long term, he and others (including some Democrats) believe that the economy would be more efficient and the tax system more rational if corporate profits were taxed once, not twice.
But the short-term impact, this official said, would be measured by a gain in the stock market, 6 percent or 8 percent conservatively, maybe even double digits.
Why? Because a dollar’s worth of dividends would really put a dollar in the stockholder’s pocket, rather than the 62 cents top-bracket earners now receive after they pay income tax on the dividend. Obviously, a stock paying $1 a share is worth more than one paying 62 cents, so the price of the stock is likely to rise.
The stock market gains the White House expects would fall far short of offsetting the decline in the averages since the bubble burst in 2000. But here’s the second part of the argument. Stockholders by the millions would feel wealthier and they would be more willing to invest and consume than they are today. Result: a shot in the arm for the stagnant economy.
The political reason the White House is reluctant to make this argument front and center in its lobbying campaign is evident: It’s too easy for the Democrats to describe it as trickle-down economics. The very term “wealth effect” sounds as if the main beneficiaries would be the wealthy.
But there is also an economic reason for keeping this argument locked in the closet — only briefly exposed to daylight. The wealth effect, in the short term at least, is less likely to create jobs than several other alternative uses of those billions.
Sen. John Breaux of Louisiana, a Democrat who supported the first Bush tax cut in 2001 but opposes this new one, says, “Consumers don’t buy because their confidence is up. They buy if they have money in their pocket. About 92 percent of the people in Louisiana would not be affected by the dividend tax repeal.”
Pete Peterson, chairman of the Federal Reserve Bank of New York and Republican head of the deficit-fighting Concord Coalition, testified recently that while stimulus is needed in a “fragile” economy, “just 5 percent of the president’s ‘economic growth’ provisions, those explicitly advertised as stimulus, would end up in consumers’ pockets this fiscal year” — and only 17 percent in the first three years.
If jobs really are the goal, it might be much more powerful to help out state and local governments, which are raising taxes and cutting jobs left and right because of their wretched budgets. Saving teachers, police and firefighters from layoffs might not bolster the stock market. But those are jobs, and jobs are what President Bush says he really wants.