NCPA - National Center for Policy Analysis

Tax Cuts: to What End?

May 20, 2003

Stimulate consumer spending? Create jobs? Grow the economy? The White House has proposed various justifications for its tax policies, former Treasury official Bruce Bartlett points out, including its embrace of the Senate tax bill passed last week. That bill, capped at $350 billion, would eliminate the double taxation of corporate income for two years. Then the tax returns.

  • Because all of the key provisions of the Senate bill sunset (expire) after a couple of years, investors and corporate executives cannot be certain the tax cuts will be extended; therefore, they are unlikely to change their behavior.
  • If they don't, there will be no economic benefit.
  • Meanwhile, the House has passed a bill that lowers both the rate on both dividends and capital gains (the increase in equities' value that gets taxed when stock or other assets are sold).
  • This would change business behavior and increase economic growth.

The two conflicting measures must be reconciled by a conference committee, but the White House is likely to insist on full elimination of taxes on dividends even if only for one day and even if every administration economists agrees that it will have no impact on jobs or growth.

The underlying problem, according to Bartlett, is that this White House may not know what its economic philosophy is. One day it talks about the importance of incentives and investment like a good supply-sider, but on the next is promoting Keynesian-style stimulus. Eliminating the dividend tax is a good long-term tax reform, while other provisions (such as the child credit) will just lose revenue and have no stimulative effect.

The Democrats are also intellectually confused. Rather than propose a plausible (though ineffective) massive jobs and public works program like they have in the past, they have decided to become deficit hawks and just criticize Republican tax cuts.

Source: Bruce Bartlett (NCPA senior fellow), "Conflicting Economic Views Endanger Effective Tax Cuts," Investor's Business Daily, May 20, 2003.


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