Why is Alan Greenspan sabotaging the president's tax cut?
In recent remarks to a group of U.S. senators, the Federal
Reserve chairman reportedly said the economy was not in need of any stimulus
and that the elimination of the double tax on dividends was unnecessary.
What could he be thinking?
The economy is clearly soft. The growth of our gross domestic
product -- the measure of the economy -- is running behind the rate of
productivity. This is pushing down jobs and bringing the unemployment rate
higher. Corporate profits are starting to recover, but companies are still
not sufficiently confident to embark on new spending of their own --
spending and investment that would mean business expansion and more jobs.
Consumers have carried the day so far during this soft recovery, but even
shopping rates seem to be a bit tired of late. Is Greenspan looking at the
same economy as the rest of us?
Today, we are in a 3-year-old trend of below-par economic
activity that has in large part been caused by the destruction of wealth,
especially business wealth. As a cure, an elimination of the investor
dividend tax would amount to a 30 percent reduction in the tax burden on
capital. It would be a real game-changer.
By reordering investment incentives, the dividend tax cut will
de-leverage corporate balance sheets and reduce wasteful corporate spending
on stock buybacks and empire-building acquisitions. Business tax compliance
will replace tax evasion schemes because after-tax retained earnings will be
"deemed dividends" that lower the tax basis of an investor's capital gains.
Simply put, Alan Greenspan should see that the tax bite on
capital will decline with the dividend tax cut and that the value of future
returns will be greatly boosted by the reduced marginal tax rate on those
returns. This will send plenty of new money into the equity markets and
raise share prices.
Since the economy is suffering from a dearth of capital -- a
basic supply ingredient that is vital for economic growth and job
creation -- economic policy should be aimed at a supply-side tax cut to cure
the problem. Demand-side solutions, such as those proposed by Sen. Tom
Daschle and other leading Democrats, have been proven ineffectual time and
again. The Democrats call for tax rebates, but less than one-fifth of
temporary tax rebates are ever spent. Economic theory and real-world
evidence teach us that temporary tax changes have no permanent effect on
George W. Bush's plan to remove the tax on investor dividends
and speed up income-tax cuts across-the-board will have both supply and
demand effects. More disposable income will be spent. Lower tax rates and
higher after-tax rewards to work and invest will motivate people on both
The Federal Reserve has rightly been pumping new cash into the
economy in recent months, as evidenced by the dollar exchange rate, which
has eased, and the price of gold (even non-war-threatened gold), which has
moved up. These are positive signs in the fight against deflation. And this
is where Alan Greenspan and the central bank should continue to aim their
In general, it appears that deflationary pressures are waning,
but businesses have still not regained pricing power.
During the recession and this oh-so-slow recovery, the market
value of business wealth, which is the principal collateral behind business
loans, has plunged so very far. Not until this collateral is revalued
significantly higher will business borrowing and equity-raising power be
Right now, nearly all the business fund-raising windows are
closed. Initial public offerings and venture-capital investments are nil.
Bank lending for business purposes is scarce. Homeowners can get plenty of
mortgage money because real-estate markets are strong. But businesses in
search of liquidity remain empty-handed because stock markets are so weak.
The problem today is capital, not consumption.
Rather than lobby senators to do nothing -- a reckless
position -- Alan Greenspan should throw his weight behind the president's
dividend tax cut. That's the best tax incentive to restore business capital
formation and the surest way to put the stock market back on track. While
he's at it, he should also make sure to keep the Fed's monetary spigots
open. That will finance today's new tax incentives and guard against any
dangerous relapses into deflation.
Get with the growth plan, Alan.