Faceoff: Will the Recently Passed Tax Cut Revive Our Economy?
By: Source: AARP Bulletin Today Date Posted: September 2003
Yes We'll See a Boom in Jobs and Stocks
By Stephen Moore
George Bush's tax cut could be the most pro-growth, pro-jobs legislation since President Reagan's famous 1981 income tax cuts. Those Reagan tax cuts helped pull America out of the economic malaise and recession of the late 1970s and led to the creation of 15 million new jobs during the prosperous 1980s.
Bush understands that with 9 million unemployed workers, this economy needs a dose of steroids. The jewel of his recovery plan is the reduction of the tax on stocks to a rate of 15 percent. This will not only provide direct tax relief to stock owners, it will also increase the value of stocks. In fact, it already has. The dividend tax cut is an especially beneficial change for seniors: about half of all dividend checks are received by Americans over 65.
Of course, the correct rate of tax on capital gains and dividends is zero. Because we tax companies on their profits when they earn them, it is an injustice to impose a second tax on those earnings through a dividend or a capital gains tax.
Some of Bush's critics ask: Why cut taxes for the wealthy? The answer is that half of all people paying the highest tax rate are small business owners. And small businesses are the lifeblood of our free enterprise economy. Jobs don't come out of thin air, and they certainly don't come from the benevolence of government. They come from the creativity of entrepreneurs who create new products and new wealth.
Forty years ago, when John F. Kennedy was promoting a jobs-creating tax cut of his own, he stated: "An economy that is hampered with tax rates that are too high will never produce enough jobs and will never produce enough revenues to balance the budget." JFK was right to cut taxes. When he did, the economy and stock market boomed. Reagan was right to cut taxes. When he did, the economy and stock market boomed. Bush is right now.
My bet is that over the next several years we will see a boom in the job and stock market that would do Reagan and Kennedy proud.
Stephen Moore is a senior fellow in economics at the Cato Institute and president of the Club for Growth in Washington, D.C.
No We'll Feel Pain as the Bills Come Due
By William G. Gale and Peter R. Orszag
Sound financial planning suggests that a family on the verge of retirement with little accumulated savings for retirement should not take a big vacation and finance it with credit card debt. The family may have a good time right now, but would return to face an ever-worsening financial situation. It would be even sillier if the family fooled itself into believing the vacation was affordable by counting only one-third of the costs it will incur.
The recently enacted "Jobs and Growth" tax cut is the national equivalent of such a vacation. The economy will get a small boost right now, but the price will be much higher than advertised. There are better ways to encourage growth now and in the future.
In the economy today, firms are reluctant to make investments because they already have idle capacity, and they are worried that consumers will stop spending. To give the economy a shot in the arm, the key is to spur spending on goods and services—so that firms feel confident enough to expand again.
In the next year or so, the recent tax cut will boost spending a little. But it could have given a bigger boost at less cost by directing more to families living paycheck-to-paycheck and to beleaguered state governments, which would have spent the funds immediately. Instead, most of the benefits go to the very highest-income households, which tend to spend little of any additional funds.
Over the longer term, the new tax cut will hurt the federal budget and the American economy. Its relatively modest effect in the short term comes at a high price: it costs more than $1 trillion over the next decade if its artificial sunsets are removed. By driving up budget deficits, the loss of revenue will put a mortgage on Americans' future national income.
Despite its name, the "Jobs and Growth" package will produce little of either and will hurt the economy as the bills come due.
William G. Gale and Peter R. Orszag are senior fellows at the Brookings Institution and co-directors of the Tax Policy Center in Washington, D.C.
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