NCPA - National Center for Policy Analysis

Tax Cut is Victory For President and All Americans

May 23, 2003

House Ways and Means Committee Chairman Bill Thomas quickly recognized that President Bush's original tax plan was no longer viable given the budget constraints, says Bruce Bartlett. He also recognized that full abolition of double taxation was not necessarily the most effective way to jump-start the economy, especially if it had to sunset after a few years to meet budget targets.

  • This led him to put forward an alternative plan that cut the top tax rate on dividends from 38.6 percent to 15 percent.
  • With the revenue that was saved, Thomas was also able to cut the capital gains tax from 20 percent to 15 percent and boost depreciation allowances for business investment by 50 percent.

The Thomas plan was a brilliant compromise that provided as much bang for the buck as one could hope for in a tax cut limited to $550 billion, says Bartlett. However, the White House was still insistent on its plan and appeared willing to totally abandon its substance just to say that the president "won." In the Senate, it was successful in getting dividend taxes eliminated for just 3 years. Doing more was impossible within a $350 billion limit.

But 3 years of dividend relief -- with full taxation returning after that -- was not enough to change corporate behavior, boost the stock market and raise growth. According to Bartlett, it was better to do a little less for longer, as Thomas proposed. Bartlett also thinks that the capital gains and depreciation provisions in his plan were crucial to increasing growth between now and next year's elections. However, some economists I respect, like Brian Wesbury and David Malpass, disagreed, saying that even temporary elimination of dividend taxes would strongly stimulate growth.

Source: Bruce Bartlett, "Tax Cut Is Victory For President And All Americans," National Center for Policy Analysis, May 23, 2003.

 

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