There can be only two reasons, and flimsy ones at that, for calling President Bush’s tax-cutting proposals a stimulus package. The honest one is that if the president gets what he wants, the economy, already in fairly good shape, might grow a bit faster this year and next than would otherwise be the case. The White House says the package will add 0.3 percentage points to 2003 growth, and 1.1 percentage points to the rate of growth next year. Disinterested experts guess that the right numbers are 0.2 and 0.8 percentage points, respectively. Meanwhile, the president’s opponents say that the increased deficits will drive up interest rates, frighten foreign investors, and in the long run reduce economic growth.
Some of the president’s men don’t much care about the long run. They recognize that the economy is likely to grow, but want insurance against, among other things, the depressing effects of continued high oil prices. To them, the stimulus package is just that, and is all about winning the 2004 presidential election.
The president also has a political reason for sticking the stimulus label on his proposal. Democrats have been shouting that the economic sky is falling, and so can hardly oppose a stimulus. They are reduced to objecting to its form, rather than to the need for such a shot in the arm to the economy.
So call it stimulus if you will, but this package is much more than that. The president has taken advantage of the fact that the truth-in-labeling laws don’t apply to politicians, and pasted the label “stimulus” on several of his long-term, conservative objectives.
Start with the proposal to end personal income tax on dividend income that has already been taxed at the corporate level. This provision accounts for about $300 billion of the $670 billion of tax relief projected over the next ten years. It has long been opposed by big business, as it will make stockholders more eager to have earnings paid out to them, rather than left in the hands of corporate executives to deploy as they think best. About 150 of the companies included in the Standard & Poor’s Index of 500 companies pay no dividends, and the dividend yield on the shares of these five hundred big companies is only 1.6 percent.
If eliminating the personal tax on dividends does increase payouts, as firms such as Oracle hint it might, more funds will be available to whatever enterprises investors find most attractive, rather than being locked into the companies that prefer to retain the money for their own use. Capital markets will have been deepened and made more competitive.
The second advantage that the White House is touting is that increased dividends will help to drive share prices up—perhaps by about 5 percent according to James Poterba, an economist at the Massachusetts Institute of Technology, twice that according to the White House. Studies show that the some 3-5 cents out of every dollar of increased wealth will be spent, but even that effect will take some three years to make itself felt. So stimulus is not the sole the reason for this portion of the tax cut.
The real objective is the longer term one of permanently binding what conservative Republicans believe to be a new class, the shareholding-investor class, to their party. According to a Wall Street Journal/NBC News poll, 62 percent of Republicans and about 50 percent of Democrats have at least $5,000 directly invested in shares or mutual funds. All in all, some two-thirds of voters own shares, either directly or pension and retirement funds. All of these shareowners would benefit from any boost to share prices resulting from the president’s plan.
Nor is stimulus the main reason for the proposal to send a check for $400 per child to families with children under the age of 16, and with incomes of less than $110,000, and to establish a permanent $1,000 per child tax credit which, it should be noted, would not go to most single moms, who are too poor to pay taxes. Conservative Republicans are convinced that marriage reduces the ranks of the poor, and believe that tax credits can stimulate family formation. So studies that show that one-off $400 checks are more likely to be saved than spent, and therefore won’t provide much stimulus, worry them not. Their goal is to encourage family formation, which is why the president proposes that a family of four, earning $40,000 per year, pay no tax, while a single person with an identical income pay almost $5,000.
Another long-term goal of Republican conservatives has been to encourage and woo entrepreneurs. The old-line, Northeastern Republican patricians were most comfortable clubbing with big business executives; new, Southwestern Reaganauts prefer self-made businessmen. So the proposed write-off allowance for new investment up to $75,000 will be available to small businesses only.
Finally, and perhaps most important, this new round of tax cuts, and the proposed acceleration of the reductions in marginal rates Bush pushed through earlier, will reduce the flow of funds to the government, and make it more difficult for the Democrats to build new entitlements into the welfare state. Leaving money with the people who earned it, rather than shipping it to Washington to be spent by Democrats (and more than a few Republicans, if truth be told), is a long-standing Bush goal.
The president will have to do a bit of political horse trading and accept some changes to get his package through the Senate, where Republicans have only a razor-thin majority. Some in his party worry about the mounting federal deficit. Other Republicans fear that Democrats’ charges that the plan favors the rich will resonate with voters. Meanwhile, Democrats are pushing a smaller plan, involving only $136 billion in tax cuts, built around $300 rebates to all workers.
In the end, Republican senators will be reluctant to oppose their popular leader, and enough of the dozen Democrats who backed the president’s tax cuts last time around will give him the sixty votes he needs to break a filibuster, although political animosity left over from the last campaign makes this far from a certainty.
But don’t look for an immediate boost to the economy’s growth rate, already likely to be quite satisfactory. This tax package is all about a reduction in the role of the state, restructuring corporate finances, and social engineering, Republican style. Any stimulus is a welcome by-product.
This article appeared in London’s Sunday Times on January 13, 2002, and is reprinted with permission.