NewsMax Staff, NewsMax Wires
Monday, Jan. 6, 2003

Some academic economists note that the fiscal policy expected to be unveiled next week may help the U.S. economy in the long term, but that it wouldn't provide an immediate short-term stimulus for the still-lagging economy.

The White House does not necessarily disagree, predicting the dividend tax cut will lift stock prices, improve business confidence and reduce corporations' costs of raising money -- all benefits to be realized over the long term.

As the New York Times reported one senior White House official as saying: "The concern here is not over the next couple of quarters. The concern is making sure we have the right flexibility in place to ensure the economy can grow at its full potential."

Daschle Comes Out Swinging

However, without mincing words, Senate Democratic leader, Tom Daschle, said the president's plan would be "the wrong idea at the wrong time to help the wrong people."

Referring to data generated by the Tax Policy Center, Daschle noted in a radio address that a person making more than $1 million a year would save $24,000 in taxes under the Bush plan while a person earning from $40,000 to $50,000 a year would save only $76.

Daschle and other Democratic lawmakers are recommending tax breaks intended for lower- and middle-income families, with some pushing a temporary "holiday" from payroll taxes for Social Security and others proposing one-time rebates.

The White House has said the president will formally announce the plan in a speech to the Chicago Economics Club on Tuesday night, the same day the 108th Congress convenes. The price tag: a potential $300 billion.

Some experts suspect the Bush plan will feature some stipulations tailored to provide relief to middle-income families, including an acccelerated increase in the child-care tax credit to $1,000 from $600 and more rapid relief of the so-called marriage penalty that pushes many two-income couples into higher tax brackets.

Also, in response to growing political criticism, the plan will include a proposal for the immediate extension of emergency federal unemployment benefits.

Though the GOP controls both House and Senate, the plan will ultimately need bipartisan support to pass the Congress.

Worried About Job Creation

"What I'm worried about is job creation. And I'm worried about those who are unemployed," Bush told reporters at his Crawford, Texas, ranch on Thursday. "So next week when I talk about the economic stimulus package, I will talk about how to create jobs ... as well as to take care of those who don't have a job."

According to administration aides, the centerpiece of the plan is 50 percent reduction of the tax on stock dividends received by individual taxpayers. Since dividends are paid from after tax corporate income, they are currently effectively taxed twice -- at the corporate level as profits and at the individual level -- so that, for example under common tax rates, $1 of corporate pre-tax income becomes less than 40 cents in the individual taxpayer's pocket.

For Jay Mandle, an economics professor at New York's Colgate University, the Bush plan is "very one-sided."

"None of its three components -- reducing taxes on dividends, accelerating already passed tax reductions and accelerated depreciation rates -- does much if anything to stimulate the demand side," Mandle said. "Recent, anecdotal, evidence suggests that this is the reverse of what is needed."

He noted that there is already is the beginning of a pickup in business investment, "but it seems likely that Christmas season spending was quite weak."

'Real Need to Reduce Taxes'

"What this suggests is that there is a real need to reduce taxes for middle- and low-income people in order to encourage consumption. If this occurred it seems likely that (business) investment would pick up without a tax stimulus in order to increase productive capacity to match this increased demand," said Mandle, who was among several academic economists interviewed Friday by United Press International.

Also expressing reservations over the proposed tax cut on stock dividends was economics professor Edward J. Deak at Connecticut's Fairfield University.

"The president is correct in asking for a stimulus package early in 2003," Deak said. "Actual real GDP growth is between 1 (percentage point) to 2 percentage points below its noninflationary potential. This helps to explain the inability to create a sufficient number of new jobs to lower the unemployment rate.

"However, based upon my research in regional economics, the elimination of all or a portion of the double taxation of corporate dividend will not provide the strongest immediate stimulus to demand."

According to Deak, the majority of dividends accrue to those earning $100,000 or above in adjusted gross income. He explained that this particular economic group has a lower tendency to spend out of any increase in income.

Economics professor Geoffrey Carliner of Babson College in Massachusetts agreed with his academic colleagues, noting that the way out of America's current economic malaise "is to boost consumption and investment immediately."

"The centerpiece of President Bush's economic proposal is likely to be a cut in the tax rate on dividends," Carliner said. "This tax cut will put money in the pockets of the richest Americans, who own stocks outside their IRAs.

"These stockholders are likely to put the money from a tax cut in the bank. What we need instead is a tax cut for lower- and middle-income Americans, who will spend the money right away."

Economist Dan Mitchell, with the conservative Heritage Foundation in Washington, praised the expected Bush proposal for a reduction in dividend taxes, noting on CNBC that such a cut "increases the incentive to work, save and invest."

Many analysts see the so-called stimlus package as just a thinly disguised tool to advance the ages-old Repbulican agenda of overhauling the entire tax system, a cornerstone argument of which is that taxing dividends amounts to double taxation of corporate profits.

Copyright 2003 by United Press International.

All rights reserved.

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