When Commerce Secretary Don Evans phoned me to praise the tax plan announced by President Bush last week -- he must have drawn the short straw to have my name on his call list -- he assured me that the "bold package" would boost "the general well-being of the people."
"Nobody wins unless we all win," the president's longtime friend said -- a sentiment with which I assured him I concurred.
In his next breath, Evans derided the rival Democratic stimulus plan -- which would cost one-fifth as much as the $674 billion, 10-year Bush package -- because it relies mainly on a one-time rebate of $300 to every taxpayer. "One-shot remedies don't work," Evans said. "You have to create a feeling of certainty for at least the next 10 years, so businesses and families can plan."
It was not that long ago that the White House was telling us that the 2001 tax rebate -- $300 for individuals and $600 for families -- had been instrumental in making the recession "the shortest and shallowest in history." But now, as the president's reelection approaches and unemployment lingers at uncomfortably high levels, the "certainty" of 2001's 10-year Bush tax plan is being scrapped by the administration in hopes of pumping the economy before the voters get to the polls.
Is it needed? In his first public appearance since he was fired last month as Treasury secretary, Paul O'Neill told a Sulgrave Club audience the other night that, with the economy growing at a 3 percent annual rate in the first three quarters of 2002, "it is hard to see a need for Keynesian remedies," i.e., further tax cuts and more stimulus.
Before the O'Neill talk, I asked one of my favorite Republican economics guides what he thought of the new Bush tax plan. He did not mince words. This man -- a veteran of the Nixon and Ford administrations and a friend and adviser to many officials in the Reagan and two Bush administrations -- said, "It may be the least defensible policy ever." I would amend that slightly: It is probably the most ill-considered since Treasury Secretary John Connally persuaded President Nixon to freeze wages and prices in 1971.
Like that move -- designed to help Nixon's reelection in 1972, whatever the damaging long-term consequences -- this latest pack of proposals reeks of politics. The proposal to eliminate taxes on dividends -- the centerpiece of the plan and the source of more than half its staggering cost -- looks like "the wrong reform at the wrong time," my mentor said.
Eliminating the double taxation of dividends -- once on the profits of the corporation and again on the payout to the stockholder -- has been discussed in every Republican administration, he said, and considered by some Democratic presidents. It has a sound foundation, because double taxation tilts corporate finance toward borrowing, rather than going into the equity markets. But, he said, business groups and almost all economists agree that the right way to remedy the situation is to make dividend payments deductible for the corporations, as interest payments already are.
Instead of that straightforward policy, the administration chose to lift the tax on dividend recipients -- eliminating any direct benefit to the companies -- so that Bush could claim, as he did, that this change "is for the good of our senior citizens" who count on dividends to supplement their Social Security.
That argument has gaping holes. As was quickly noted by the accounting industry, the Bush proposal entails complicated calculations for both business and individual taxpayers, adding further complexity to the tax code.
Moreover, it would not affect the mass of dividends that go into the 401(k) plans on which most working Americans depend for additional retirement income. Those dividends are not immediately taxed now, and the taxes due when the money is withdrawn would remain unchanged under the Bush proposal.
According to an analysis by the Urban Institute and the Brookings Institution, 64 percent of the $364 billion in benefits from dividend tax elimination would go to the top 5 percent of taxpayers, the same people who are the main beneficiaries of the Bush tax cuts of 2001.
Over time, eliminating this tax would likely deepen the growing budget deficits. The first round of Bush tax cuts will cost more than $1.3 trillion in revenue over 10 years. This package pushes the costs to the $2 trillion level -- even as the demands of homeland defense, the war on terrorism and a possible attack on Iraq add to spending pressures.
But none of this is likely to deter Bush. His arguments are flexible, but the policy is constant: Keep cutting taxes from the top down.