TCS Daily

Victory Not Enough

By James K. Glassman - April 15, 2003 12:00 AM

Three months ago, President Bush proposed reviving the economy with a package that would cut the tax bills of 92 million Americans. The president has had other things on his mind since then, and the opposition of only a few Senators pared the package back in the budget resolution last week. But there's still a chance that nearly everything the president wants will become law later this year. Let's hope so.

Our success in Iraq will lift the fog of geopolitical uncertainty that's stifled the economy and set the stage for a recovery. But by itself, this victory is not nearly enough. To get people back to work, and to start quickly once more down the road to prosperity, America urgently needs a smart and significant tax cut.

It was almost 40 years ago that a Democratic president, John F. Kennedy, also faced with national-security threats and a stock market decline, came to the same conclusion. On Dec. 14, 1962, he urged Congress to "reduce the burden on private income and the deterrents to private initiative that are imposed by our present tax system. Corporate taxes were cut and rates in the top personal brackets were reduced 21 percent. And the economy and the market took off.

As good as Kennedy's plan was, Bush's is better. It makes the reductions in tax rates that were enacted in 2001 effective this year, rather than far into the future. It sets a new bottom tax bracket of 10 percent, rather than the current 15 percent. It reduces the marriage penalty this year, instead of waiting until 2009, cutting taxes for 46 million couples. It raises the child tax credit from $600 to $1,000 this year instead of 2010, so a middle-income family with two children would get an extra $800 taken right off its tax bill, in many cases cutting it by half or more.

The package would also help small businesses by letting them deduct $75,000 a year (instead of the current $25,000) for purchases of computers and other capital investments.

And, in the most profound change of all, it would end the double taxation of dividends. Nearly half of all American families own stock. They would no longer have to pay taxes on the dividends they receive.

All of these changes would put more money - an average of $1,083 - into the pockets of nearly all taxpayers, and, because the Treasury would reduce withholding taxes immediately, Americans would be able spend the extra cash or invest it to boost the economy at a critical time. According to the Council of Economic Advisors, the increased economic activity that would result would create 1.4 million new jobs by the end of 2004.

How can a few Senators oppose a bill to rejuvenate the economy?

They are well-meaning but misguided. Their main worry is that the gap between Washington's expenditures and its tax revenues - that is, the federal deficit - is widening. Certainly, deficits can't be ignored, but put them in perspective. Compared with the size of our economy, the U.S. deficit is the lowest among all industrial nations. Also, the president's proposal would reduce tax revenues by $726 billion over 10 years. But during that time, our total Gross Domestic Product, or national economic output, will be about 200 times as great. In fact, the only problem with the president's package is that, in an economy which, even today, is generating a GDP of more than $10 trillion (greater than the next five countries combined), the tax cuts may be too small.

Politicians need to think long and hard before they spend federal dollars. Once they decide, then they have two ways to get the money to pay the bills: taxes or loans. The effects are pretty much the same when the economy is good. But when it is struggling, as it is today, many economists believe it is better to borrow - especially at the low interest rates that currently prevail. There's nothing wrong with borrowing. You do it yourself when you buy a house. The question is whether you burden yourself with too much debt.

But think of it this way. The federal debt is about one-third of GDP. That's the equivalent of a mortgage (plus all credit-card, auto and other debt) of about $20,000 for a family making $60,000 a year - not troublesome at all, especially if income is rising. And, under the president's plan, the proportion of debt will fall dramatically over time, until it is less than one-sixth of GDP.

Not only would the dividend-tax change give Americans more money to spend and invest, it would increase the value of the stocks that half of all U.S. families own - even stocks held in tax-advantaged accounts like IRAs and 401(k) plans. All economists agree that, by increasing the after-tax returns on stocks, the Bush proposal would raise the prices of those stocks in the market. How much? At least 10 percent and probably more.

This gain in wealth will make families more secure about increasing their spending and investing - at just the right time.

Yes, the victory in Iraq liberated millions and, by removing troubling uncertainty, set the stage for an economic recovery. But without the tax package, that recovery will be postponed, more jobs will be lost, and more families will be hurt. It's time for recalcitrant Senators to stop playing politics and back this sensible package.

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