Here we go again, as Ronald Reagan used to say. The Bush administration has already taken advantage of our most recent recession to pass a $1.35 trillion tax cut, of which 36 percent went to the richest one percent of taxpayers. These are people with an average annual income of $1.1 million.
While most people see the coming recession as a danger, these champions of the rich and the super-rich see yet another opportunity to shift the tax burden away from their friends and campaign contributors. Hence the administration’s bold new initiative: eliminate the tax on stock dividends. (Dividends are a portion of a corporation’s profits that are paid out to stockholders).
About half of the households in this country are automatically excluded from this gift, since they don’t own any stock at all, even through retirement accounts. You might think that at least the other half would get something out of this new tax loophole. No such luck. The vast majority of people who hold stock do so through retirement accounts. If you are in this category, your dividend income will accumulate just as it does now, in your retirement account. And then you will be taxed on this income when you draw it for your retirement.
In other words, the millions of ordinary Americans who are holding stocks in retirement accounts will get absolutely nothing from eliminating the tax on dividends. And even among those who hold stock outside retirement accounts, ownership is highly concentrated. So most of this tax break will go to (surprise!) the richest taxpayers.
So how are they selling this new scam? The same way they sold the last one: it’s an “economic stimulus” package. According to R. Glenn Hubbard, chairman of President Bush’s Council of Economic Advisors, the dividend tax cut could raise stock prices by 20 percent.
Mr. Hubbard hasn’t quite figured out what millions of people who lost much of their retirement savings in the last three years learned the hard way: there was a bubble in the market, and it’s not coming back. Stocks are still a bit pricey even now: the market’s price-to-earnings ratio — the best measure of how expensive stocks are relative to the earnings that the companies can produce — is about 18 to 1. The historic average over the last 75 years is about 14.5 to 1. The smart money isn’t about to gamble on a big rebound for the stock market.
The whole idea of stimulating the economy through the stock market is not one that economists would take seriously in any case. But then again, this tax cut isn’t really meant to help the economy any more than the last one was. Recall that the actual stimulus that did result from the last tax cut was tacked on to President Bush’s proposal by his toughest opponents: the House Progressive Caucus (almost all Democrats) added the $300 rebate that you may have gotten last year.
To give the economy a boost and avert a recession, we do not need to rewrite the tax code, as in 2001, over a 10-year period. Rather we need an immediate, one-time stimulus: for example, some serious help for the state and local governments that are desperately cutting spending on everything from hospitals to education in order to balance their budgets. And if we want something for individuals, how about a rebate for the 34 million taxpayers who didn’t get even a dollar from the last round of tax cuts? To give them their $300 rebate would cost $10 billion, quite a bargain compared to the estimated $300 billion over the next 10 years that the dividend tax giveaway will cost the U.S. Treasury.
If Mr. Bush embarks on a war with Iraq, which he seems to want very badly, it will almost certainly cause serious harm to the economy. The situation will resemble that of September 11, 2001, when an economy that was already in recession fell under a cloud of uncertainty that further depressed business investment and consumer spending. At that point he may wish he had proposed a real economic stimulus instead of this scam.
It is amazing that the President and his advisors have not considered this possibility. Or if they have, it hasn’t worried them enough to make them take a break from their continuing “class warfare” — which they regularly accuse their critics of waging — on the home front.
Mark Weisbrot is Co-Director of the Center for Economic and Policy Research, in Washington D.C.