With thousands daily joining the ranks of the unemployed and state and local governments slashing services to plug budget gaps, President George W. Bush Jan. 7 unveiled a package of new and permanent tax cuts that primarily benefit America’s wealthiest, while failing to stimulate an ailing economy and hurting the states.
According to an analysis by the nonprofit group Citizens for Tax Justice (CTJ), the top 1 percent of American taxpayers—making $374,000 or more annually with an average income of $1.1 million—would save more than $30,000 a year in taxes under the Bush plan. But typical taxpayers—those with incomes of $29,00 to $46,000 a year—would save only $289. And those making between $16,000 and $29,000 would keep just $99.
The Bush administration has asserted repeatedly that "92 million taxpayers would receive, on average, a tax cut of $1,038 in 2003." But this information is misleading, according to the nonprofit Center on Budget and Policy Priorities (CBPP), because the administration has averaged the big tax cuts going to those at the top of the income spectrum with the far more modest ones going to those in the middle, plus the very smallest tax cuts going to working families with low incomes.
The AFL-CIO has released a plan to create jobs and lift the economy by extending unemployment benefits, aiding states, accelerating infrastructure investments, rebating some taxes to all workers and increasing the minimum wage.
Most of the Plan Would Not Boost the Economy
Denying relief to working families and the states, the Bush plan fails to give the economy the immediate boost it badly needs now to save and create more jobs. The president's package would cost $676 billion over 10 years, with interest costs adding at least $250 billion for a total price tag of at least $925 billion, according to the CBPP. "Yet only about $100 billion will provide stimulus this year, when the economy needs help," says a Senate Democratic Policy Committee analysis.
Denying relief to working families and the states, the Bush plan fails to give the economy the immediate boost it badly needs now to save and create more jobs. According to a Senate Democratic Policy Committee analysis, “The president's package would cost $676 billion over 10 years, with interest costs adding hundreds of billions more. Yet only about $100 billion will provide stimulus this year, when the economy needs help.”
While the rich have the luxury of being able to save their tax breaks, working families generally need to spend them immediately, which stimulates the economy. The Bush plan “flies in the face of effective stimulus,” the analysis said. “It steers the benefits to those least likely to need to spend an additional dollar of income.”
The plan’s centerpiece is a total and permanent elimination of the tax on dividends—the portion of profits that corporations sometimes distribute to shareholders. Abolishing that tax would cost the federal government more than $364 billion over the next 10 years— more than half the Bush plan’s entire $676 billion cost—while failing to stimulate the economy and providing no immediate financial relief to those who need it most.
“This is a pig that even a Republican python might not be able to swallow,” said Robert D. Reischauer, president of the Urban Institute think tank and former director of the Congressional Budget Office. “It's breathtakingly large, considering the deficits and the political pressure to spend more on defense, security and prescription drugs for the elderly. Dividend tax relief is like putting frosting on an unbaked cake.”
In recent weeks, budget experts have reported how domestic spending needs of working families, already under strain from the first Bush tax cuts and the economic downturn’s impact on government coffers, would be squeezed out by proposed Bush tax breaks—effectively leaving little to spend on domestic priorities like health care, education and more.
A Tax Cut that Benefits a Sliver of Rich Americans
According to the Urban-Brookings Tax Policy Center, an independent, foundation-supported research group, 64 percent of that $364 billion would go to the richest 5 percent of taxpayers. That’s because the cut only helps those who hold stock outside tax-deferred retirement plans, a situation that occurs in just 4.7 million tax returns.
According to CTJ, the top 1 percent of taxpayers—making $374,000 or more—would reap an average $11,483 from the dividend tax cut. The next 4 percent, making between $154,00 and $374,00, would get an average break of $1,332. But the middle 20 percent of taxpayers, making between $29,000 and $46,000, would get $27.
The dividend tax cut also is unfair to the majority of stockholders—working Americans who own stock only through retirement plans, including 401(k) retirement plans. When they eventually cash out 401(k)s to have money for their retirements, under the Bush proposal they will still pay taxes on the dividends that accrued in their plans.
The Dividend Tax Is Not ‘Double Taxation’
In a Jan. 8 speech, Bush said the current dividend tax amounted to “double taxation” because corporations already had paid taxes on profits. But that’s incorrect, said Dean Baker, co-director of the nonprofit Center for Economic and Policy Research.
“Congress set the corporate tax rate at the current level with the expectation that the portion of profits paid out as dividends would also be subject to taxation,” he explained.
“If there is now a concern that the taxation of dividends is an inappropriate form of double taxation, then the remedy should include raising the corporate tax rate. Given the sharp decline in both the effective corporate tax rate and the top tax rate for individuals, there is far less basis for any concern about the ‘double taxation’ of dividend income than at any point in the post-war era.”
Bush Plan Not Only Fails to Help Struggling States, It Hurts Them
Because most states tie their income tax laws to federal laws, the Bush plan could cost states a combined $4.5 billion by eliminating the dividend tax, according to the National Conference of State Legislatures. And removing federal taxes on dividends makes stocks more attractive to investors than the traditionally tax-free municipal bonds that local governments must sell to finance their infrastructures.
There couldn’t be a worse time to take income from the states, now preparing massive cuts to balance their budgets. Forty-three states are currently in the red, led by California facing a $34 billion budget gap for the next year and a half. Overall for 2004, the states are facing their largest shortfall in 50 years, as much as $85 billion, according to a study by the nonprofit CBPP.
According to Brookings Institution think-tank economist William Gale, “The best way to boost the economy right now would be to increase federal aid to the states, which are facing their worst financial crisis in decades….An administration that purports to care about economic growth and ‘leaving no child behind’ should help states maintain critically needed spending on education and other investments. This would boost the economy now and augur well for the future.”
A Jan. 8 The New York Times editorial said, “Inexcusably, the [Bush] package includes no assistance for states struggling to keep up with rising security and health care costs,” and it called for a more targeted plan resembling the Democrats’ proposal. “At less than one-fourth the $674 billion cost of the president’s extravagant designs, their plan provides short-term relief to states and working-class Americans, thereby doing more to insure against an economic slowdown.”
More
Op-ed by AFL-CIO President John J. Sweeney in The Washington Post.
Download a copy of the AFL-CIO plan, Recovery for All, Not Just for Some: An Agenda to Create Jobs and Lift the Economy.
AFL-CIO news release on the economic plan.
Check out the Economic Policy Institute’s briefing paper, Generating Jobs and Growth: An Economic Stimulus Plan for 2003.
Read Principles for Economic Stimulus from the Center on Budget and Policy Priorities.
