Saving The Bush Tax Plan
May 5, 2003
With a $350 billion revenue loss cap imposed in the Senate, there is now a danger that Congress may pass a tax cut bill that is worse than doing nothing. says Bruce Bartlett.
One of the worst ideas, according to Bartlett, is to phase-in the dividend tax cut.
- On paper, this reduces the revenue cost and still allows the White House to claim victory for its proposal.
- But the result could be that businesses will have an incentive to shift dividends into the future.
- This might lead them to minimize profits in the short-run by incurring costs now while realizing income later.
- The effect would be to reduce growth of the gross domestic product going into 2004.
While total dividend income is only about 5 percent of personal income, it is much more volatile than wages and salaries. In any given year, changes in dividend income can account for a significant amount of the variation in personal income growth. Personal income represents 85 percent of gross domestic product, so even small changes in personal income can raise or lower the GDP growth rate.
In 1992, as a result of Bill Clinton's tax increase, people shifted income from 1993 into 1992 so that it would be taxed at lower rates. While the number of people who had the freedom and foresight to do this was small, it was enough to significantly impact the national economy. Personal income rose sharply in the 4th quarter of 1992 and then plunged in the 1st quarter of 1993. Personal income remained weak for the rest of the year and did not rebound until 1994.
Source: Bruce Bartlett, "Saving the Bush Tax Plan," National Center for Policy Analysis, May 5, 2003.
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