At the same time, continued slow growth in the economy has made the need for short-run stimulus more pressing. The dividend plan was always more tax reform than short-run stimulus. But with full recovery still ahead and a presidential election next year, attention has shifted toward stimulus and away from reform.
The only way the dividend plan could be viewed as stimulative is if it has a sharp, positive impact on the stock market. If it provided a 20 percent bounce, as some economists thought was possible, then this might stimulate investment spending by businesses and improve consumer confidence. But if the dividend plan is watered down to a 50 percent exclusion at most—as seems inevitable—then there is no reason to think that the stock market will react enough to matter economically.
Consequently, many insiders are now saying that it may be prudent for the President to withdraw his dividend plan and resubmit it later as part of a tax reform package. Given that the full plan, with its $400 billion price tag, is politically impossible now, it makes more sense to reprogram the revenues into other areas with more potential stimulus.
Many economists think that increasing depreciation allowances would do more for the economy now. This would encourage businesses to invest in new capital equipment because that is the only way they would get a tax saving. One popular idea would be to allow a 100 percent write-off for high-tech equipment in the year of purchase. With lagging capital spending being the economy’s principal weak spot, such a proposal would directly target that spot.
If President Bush insists on pressing forward with his dividend plan under these circumstances, I fear the following: a dividend exclusion that is so severely watered down that it will have no meaningful economic impact, but which uses up all the revenue available for true stimulus, making it impossible to enact something like expensing for high-tech equipment. The result could be a worst-case scenario—large revenue losses with no economic stimulus and, perhaps, a weak economy going in to 2004.
In coming days, President Bush will have to make some critical decisions about his tax plan as the House Ways and Means Committee and Senate Finance Committee begin to mark-up a bill—a task that they must finish by May 8. He should not let pride in his own proposal stand in the way of achieving something that will help the economy now.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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