Not Very Stimulating: The Bush Tax Cut

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Dean Baker
Columbian (WA), Jan. 10, 2003
Bradenton Sunday Herald (Bradenton, FL) - January 12, 2003
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(Logansport, IN) - January 12, 2003
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(Jackson, MS) - January 12, 2003
The Birmingham News
- January 13, 2003
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(Newport News, VA) - January 13, 2003
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(Burlington, IA) - January 14, 2003
Telegraph Herald
(Dubuque, IA) - January 19, 2003

And the answer is – tax breaks for the rich. With the Bush crew in the White House, there is never very much suspense. No matter what the issue or challenge, the answer always seems to be the same – tax breaks for the rich. This was the answer when the economy was strong and we had a large budget surplus. It was the answer after the September 11th terrorist attack. And it is also the President’s answer to the problem of a slumping economy.

Just to set the scene: we have an economy that is reeling from the bursting of a stock market bubble. The imminent collapse of a housing bubble looms on the horizon. The dollar is tumbling as investors realize that the United States can’t borrow $500 billion a year, from the rest of the world, indefinitely. 

The top executives of many of the nation’s largest corporations have been exposed as sleazy con artists who are more expert at cooking books than running a profitable business. Everyone from the accountants, to the stock analysts, to the business press has either been in on the scam, or too dumb to have any idea of what's been going on. Meanwhile, the unemployment rate is at its highest level in 8 years, and not likely to drop anytime soon. 

President Bush’s response is more tax breaks for the rich. President Bush wants to take more than $650 billion from the public, and give the bulk of it to the richest 1 percent of the country. While he has a few nickels and dimes for the rest of us – an expanded child tax credit, for example – there is no dispute that the richest will get the bulk of this package, with the top 1 percent likely getting more than half.

The main feature of the Bush tax plan is removing the tax on stock dividends for rich people. This tax cut has been widely mis-reported. Tens of millions of workers hold stock through their retirement accounts. These workers will still be taxed on their stock dividends, just as they were before the tax cut. The dividend tax break only applies to stock held outside of retirement accounts, the majority of which is held by the richest 1 percent of the population. 

President Bush tells us that giving another quarter million dollars to each of the richest million families in the country is the best way to help the economy. This would be slightly more believable if he at least had a consistent story. On the one hand, his advisors have said that the point of the tax cut is to lift the stock market, which will lead consumers to buy more things. On the other hand, his advisors have also said that the point of the tax cut is to give families more incentive to save.  

It is possible that the tax break will lead to more consumption. Alternatively, it is possible that it will lead to more saving, depending on what the rich end up doing with their money. But the tax cut cannot possibly lead to both more saving and more consumption. A dollar can be either saved or spent -- you can’t do both with the same dollar.  

The economy badly needs a real stimulus – which means either government spending or household consumption – to get us of this slump. Investment would be nice also, but it’s very hard to spur investment when most businesses already have large amounts of excess capacity. Showering more money on the rich just won't make it as an economic stimulus.    


Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.