Bush's New Tax
Cut
Another Dividend For The Rich
by Mark Weisbrot
Dissident Voice
January 20, 2003
Here we go again,
as Ronald Reagan used to say. The Bush administration has already taken
advantage of our most recent recession to pass a $1.35 trillion tax cut, of
which 36 percent went to the richest one percent of taxpayers. These are people
with an average annual income of $1.1 million.
While most
people see the coming recession as a danger, these champions of the rich and
the super-rich see yet another opportunity to shift the tax burden away from
their friends and campaign contributors. Hence the administration's bold new
initiative: eliminate the tax on stock dividends. (Dividends are a portion of a
corporation's profits that are paid out to stockholders).
About half of
the households in this country are automatically excluded from this gift, since
they don't own any stock at all, even through retirement accounts. You might
think that at least the other half would get something out of this new tax
loophole. No such luck. The vast majority of people who hold stock do so
through retirement accounts. If you are in this category, your dividend income
will accumulate just as it does now, in your retirement account. And then you
will be taxed on this income when you draw it for your retirement.
In other words,
the millions of ordinary Americans who are holding stocks in retirement
accounts will get absolutely nothing from eliminating the tax on dividends. And
even among those who hold stock outside retirement accounts, ownership is
highly concentrated. So most of this tax break will go to (surprise!) the
richest taxpayers.
So how are they
selling this new scam? The same way they sold the last one: it's an
"economic stimulus" package. According to R. Glenn Hubbard, chairman
of President Bush's Council of Economic Advisors, the dividend tax cut could
raise stock prices by 20 percent.
Mr. Hubbard
hasn't quite figured out what millions of people who lost much of their
retirement savings in the last three years learned the hard way: there was a
bubble in the market, and it's not coming back. Stocks are still a bit pricey
even now: the market's price-to-earnings ratio -- the best measure of how
expensive stocks are relative to the earnings that the companies can produce --
is about 18 to 1. The historic average over the last 75 years is about 14.5 to
1. The smart money isn't about to gamble on a big rebound for the stock market.
The whole idea
of stimulating the economy through the stock market is not one that economists
would take seriously in any case. But then again, this tax cut isn't really
meant to help the economy any more than the last one was. Recall that the
actual stimulus that did result from the last tax cut was tacked on to
President Bush's proposal by his toughest opponents: the House Progressive
Caucus (almost all Democrats) added the $300 rebate that you may have gotten
last year.
To give the
economy a boost and avert a recession, we do not need to rewrite the tax code,
as in 2001, over a 10-year period. Rather we need an immediate, one-time
stimulus: for example, some serious help for the state and local governments
that are desperately cutting spending on everything from hospitals to education
in order to balance their budgets. And if we want something for individuals,
how about a rebate for the 34 million taxpayers who didn't get even a dollar
from the last round of tax cuts? To give them their $300 rebate would cost $10
billion, quite a bargain compared to the estimated $300 billion over the next
10 years that the dividend tax giveaway will cost the U.S. Treasury.
If Mr. Bush
embarks on a war with Iraq, which he seems to want very badly, it will almost
certainly cause serious harm to the economy. The situation will resemble that
of September 11, 2001, when an economy that was already in recession fell under
a cloud of uncertainty that further depressed business investment and consumer
spending. At that point he may wish he had proposed a real economic stimulus
instead of this scam.
It is amazing that the President and his advisors
have not considered this possibility. Or if they have, it hasn't worried them
enough to make them take a break from their continuing "class
warfare" -- which they regularly accuse their critics of waging -- on the
home front.
Mark Weisbrot is Co-Director of the Center for Economic and Policy Research, a nonpartisan think-tank in the nation's capital. Readers may write him at CEPR, 1621 Connecticut Ave NW, Suite 500, Washington, DC 20009-1052 and e-mail him at Weisbrot@cepr.net