This article takes a different approach than you've most likely heard.....I've cut and pasted because you must register to read the article and before you say 'More Conservative Dribble,' it's from The New Republic and they are far from Conservative...
Interesting read to say the least. Targeting a tax cut to those that vote. Gotta love it!
WHITE HOUSE WATCH
Wealthy Choice
by Ryan Lizza
Post date: 01.09.03
Issue date: 01.20.03
On the afternoon of President Bush's economic speech this Tuesday, there was no happier Republican in Washington than Grover Norquist, the president of Americans for Tax Reform, conservative-coalition builder, and the White House's favorite anti-tax radical. Like many conservatives, Norquist has long fought to kill the tax on dividends, and he was giddy that Bush made that the centerpiece of his new tax plan. He had just come from a debate on National Public Radio in which he eviscerated a "midget commie from Massachusetts"--former Clinton administration Labor Secretary Robert Reich--and couldn't wait to square off Thursday on Bill Moyers's PBS show, which he "thinks" is called "Why we should steal everyone's money and give it to bums who won't work." He was looking forward to meetings on Friday with Dick Cheney and Karl Rove, presumably to plot a strategy for getting the new plan passed. Norquist insists the dividend tax-cut debate will be devastating for his opposition. "We are going to cripple the entire Democratic leadership all at once," he predicts. "I'm winning on all fronts."
It wasn't obvious, however, that this was the front the Bush administration wants attacked. In fact, in the pantheon of taxes that conservatives like Norquist have fought to eliminate, the tax paid by shareholders on their dividends has never quite caught on like the "death tax" or "marriage penalty." First of all, very few people actually pay it; only one-quarter of all tax-filers currently receive dividends. And, for Republicans defensive about tax cuts skewed toward the ultra-wealthy, a crusade against the dividend tax confirms their opponents' worst suspicions: More than 70 percent of the benefits of eliminating it will go to the wealthiest 5 percent of American taxpayers.
Why then has the Bush administration suddenly taken an issue dear to a handful of anti-tax cranks and made it the cornerstone of its economic policy? Partly it's because the administration thinks it can make the politics work. But mainly it's because conservatives inside and outside the White House fervently believe that the key to economic health (and Bush's reelection) is a booming stock market.
Democrats are already calling the tax cut a payoff to Bush's K Street allies. But that analysis doesn't quite hold up. To begin with, the case against the dividend tax is that it is "double taxation"; corporations pay a tax on their profits, and then investors pay a tax when they receive those profits as dividends. If Bush really wanted to reward the business community, he would have proposed eliminating this tax at the corporate end. But, fearing being tarred as too close to corporations, he rejected this approach. The other problem with the simple K Street explanation is that the business community hasn't been clamoring for a dividend tax cut. What corporations really wanted from Bush were new tax incentives for investment--and they didn't get them.
In fact, Bush's embrace of the dividend tax cut is less about campaign contributions than ideology. In the past, liberals and conservatives both discounted the stock market's role in stimulating the economy. But, during the Clinton boom, this view began to change. Most famously, Alan Greenspan warned that overvalued markets could actually cause inflation. Economists call it the "wealth effect," and now Bush and his aides have become its greatest champions. Simply put, the wealth effect is the extra dollar amount a person spends from an increase in wealth. The theory is that the 1990s stock boom dramatically increased the net wealth of many Americans. The stock market soared, investors' portfolios fattened, and--at least on paper--investors' net wealth shot up, leading them to consume more. Even if they didn't have actual extra income, they felt rich and therefore spent more and saved less. That investor-class consumption drove the '90s economy. By making the dividend tax cut the centerpiece of his economic plan, Bush is embracing the idea that the stock market is the most important economic indicator in the United States--in other words, he's embracing the wealth effect.
The most influential work on the wealth effect has been done by Michael Palumbo, a Federal Reserve Board economist. In a recent study, he and another Board economist, Dean Maki, showed for the first time that in the '90s the households that gained the most from the stock-market boom are the same households responsible for the era's plummeting savings rate. Almost all the drops in savings in the late '90s--from about 7 percent of disposable income to about 1 percent--can be attributed to the richest 20 percent of households. The savings rate of the bottom 80 percent--the people least likely to own stocks--barely changed. Another influential paper, by Maki and fellow Board economist Karen Dynan, looked at data from 1983 to 1999 and clearly showed that stock-owning households spend more after stock prices rise, while non-stock-owning households don't.
The most radical part of Palumbo's work is his rejection of the traditional economic view that to stimulate the economy, cash must be pumped into the hands of lower-income Americans--in the form of a quick rebate check or payroll tax holiday, for example--because they are more likely than the wealthy to spend that extra disposable income. For adherents of the wealth effect, the way to boost consumption is to make relatively wealthy investors feel richer by juicing the stock market. One of the main critiques of the wealth effect was that it was impossible that the small slice of shareholding households was responsible for so much extra spending. But Palumbo says that is exactly what happened. "[A]ll of the consumption boom [of the '90s] really can be attributed to the richest groups of households," his paper argues.
You won't hear the White House making this point publicly, but the Bushies believe that returning cash to rich investors is their insurance policy against a bad economy in 2004. While Greenspan worried about the inflationary impact of the wealth effect, that danger has obviously passed. Now the danger is that battered investors will stop consuming. In a recent speech, Bush's top economist and the architect of the new plan, Glenn Hubbard, noted, "One of the key risks obviously now in the economy's recovery are recent equity price declines in the United States. And you know there's something called a wealth effect, an effect on consumer spending and business spending when wealth is destroyed, much as we have seen in the decline in stock-market prices in the United States."
What worries Hubbard and the White House is that more than $7 trillion in value has been wiped out of the stock market over the last three years. According to the wealth effect, consumption should be plummeting in the wake of the market's decline, and yet consumer spending has continued to hold up the economy. One reason for this is that the enormous decline in the value of stocks has been cushioned by an incredible rise in the value of homes. "Fortunately, the losses in stock wealth to the midpoint of 2002 have been partly offset by gains in real estate wealth in the United States," an analysis from the financial services firm RBC recently noted. But wealth effect advocates also attribute the continued spending to the slow pace at which investors fully adjust to their decreased wealth. In other words, the predicted drop in consumption may well kick in this year.
For the White House, that means stimulating the stock market is more important than ever. Bush's aides argue that the dividend tax cut will bring investors flooding back into the market and raise share prices by 10 percent, which will presumably keep consumption high as shareholders start to feel wealthy again.
This emphasis on the investor class dovetails with the politics of Bush's reelection. He cares about how the economy will look to voters in 2004, not today. If the dividend tax cut has any impact on the markets and consumption, it won't be until next year, when Bush is campaigning. Bush is also trying to appeal to the two-thirds of voters who own stocks. The Democrats failed to capitalize on the bear market in the last election, and Bush wants to put them on the defensive about an issue supposedly dear to investors. "They are all getting locked in as enemies of the investor class," says one Republican strategist. And whereas in the 1970s and 1980s unemployment and inflation were the key indicators of economic performance to the public, the White House has come to believe that the stock market is now the key barometer. "There is a new number, and it is wealth," says Norquist. If the economy cooperates with these politics, the White House will have invested well.
Ryan Lizza is an associate editor at TNR
Copyright 2002, The New Republic
Interesting read to say the least. Targeting a tax cut to those that vote. Gotta love it!
Facebook
Twitter