The Bush administration is rapidly losing control of the tax legislative process. Its unwillingness to acknowledge that its plan needed to be totally rethought once a $350 billion revenue loss cap was imposed in the Senate has created an anarchic situation in Congress. There is now a danger that Congress may pass a bill that is worse than doing nothing.
New tax ideas are streaming forward hourly to fill the gap left by de facto abandonment of President Bush's proposal to eliminate double taxation of dividends. But because the administration continues to cling to its original plan, there is no one in a position of authority to say which of these ideas are good and which are terrible.
One of the worst ideas is to phase in the dividend tax cut. On paper, this reduces the revenue cost and still allows the White House to claim victory for its proposal. But the result could be that businesses will have an incentive to shift dividends into the future. This might lead them to minimize profits in the short-run by incurring costs now while realizing income later. The effect would be to reduce growth of the gross domestic product going into the 2004 election.
We saw such a phenomenon in 1992 as a result of Bill Clinton's tax increase. People like his wife, Hillary, then a high-priced lawyer for the Rose Law Firm in Little Rock, Ark., knew he was going to raise taxes and so shifted some of her income from 1993 into 1992 so that it would be taxed at lower rates. While the number of people who had the freedom and foresight to do this was small, it was enough to significantly impact the national economy. Personal income rose sharply in the fourth quarter of 1992 and then plunged in the first quarter of 1993. Personal income remained weak for the rest of the year and did not rebound until 1994.
Something similar might result from phasing in a dividend exclusion. While total dividend income is only about 5 percent of personal income, it is much more volatile than wages and salaries. In any given year, changes in dividend income can account for a significant amount of the variation in personal income growth. Since personal income represents 85 percent of GDP, even small changes in personal income can raise or lower the GDP growth rate by enough to matter in terms of perception of how well the economy is doing. Even knocking tenths of a percent off the GDP growth rate in an election year can have important political consequences.
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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