Coalition Says White House Economic Stimulus Proposal Is Irresponsible, Ineffective And Risky.

Bush plan fails to meet basic principles for real economic stimulus, say progressive groups uniting around an ALTERNATIVE to Bush’s repackaging of old conservative ideas to help the wealthy.

Washington, DC — Audacious was the word used by the Wall Street Journal on Tuesday to describe the new Bush economic plan, which the President rolled out in Chicago. Once again, George Bush has used our nation’s hard times to sell a radical payback plan for those at the top of the income ladder. Flanked by the words “jobs, growth, and opportunity,” Bush outlined a plan, which actually contained little that could possibly create jobs or spur economic growth. As the nation’s economy suffers and unemployment grows – George Bush proposes to turn hundreds of billions of dollars to those who need it least.

A growing coalition of public interest organizations has come together to challenge the Bush economic approach on the grounds that the Bush plan:

- is not a real stimulus plan and would not produce the jobs and growth we desperately need,

- rewards the wealthy while giving inadequate help to the rest of us,

- undermines long-term fiscal responsibility and cripples our ability to make crucial investments in our economy and our people.

Our growing coalition represents the majority of Americans given short shrift by the Bush plan. We are pledged to fight it. And many of our organizations are also proposing alternative plans that could actually stimulate healthy economic growth, provide necessary help to Americans hurt by the economic slowdown, strengthen our ability to achieve future budget priorities, and get the economy going again.

One key alternative proposal for jobs and growth comes from Lawrence Mishel, President of the Economic Policy Institute. (Similar plans have been advanced by the AFL-CIO, and House and Senate Democrats. – See below.) Dr. Mishel has elaborated a set of common sense principles – shared by most of our coalition partners – which any serious stimulus plan should meet.

1. It must be effective at generating jobs and growth.
2. It must be fiscally responsible – and not worsen deficits in the long run.
3. It should take effect immediately.
4. It should be fair – not just favoring the rich or making the tax code less progressive.
5. It should target unmet needs.

We intend to challenge all lawmakers- especially conservative Democrats and moderate Republican Senators -to support only proposals that meet these common sense principles. The Bush plan fails the test as outlined below.

1. It must be effective at generating jobs and growth.

Bush’s proposal to eliminate taxes on dividends represents more than one half of the estimated $600 billion ten year cost of the whole Bush plan. But this proposal would have little positive impact on jobs and economic growth in the current year. And many economists question whether it would even help the economy in the long term. The dividend tax cut is just another attempt to tilt the tax code in favor of our nation’s elite.The debate over cutting dividend taxes is a diversion from the need to stimulate the economy in the near term.

See an analysis of the dividend tax cut at:http://www.cbpp.org/1-6-03tax.htm.

Also, cutting the individual tax on dividends would reduce state revenues, because of linkages between state and federal tax codes. Eliminating the tax could reduce state revenues by more than $4 billion. Most states will have to raise taxes or cut expenditures dollar for dollar to recoup from the dividend giveaway, further undermining the proposal’s effectiveness as economic stimulus.

Bush’s proposal to accelerate previously-passed tax cuts for individuals will, like the dividend tax cut, also primarily benefit the wealthy, not middle-income and low-income Americans. The wealthy are not likely to change their buying habits, in response to a tax cut, but the rest of us tend to spend whatever tax cuts we receive- thus, stimulating the economy.

Bush would give only $3.6 billion to the states, and that would have to be used to fund a new program, called Personal Re-employment Accounts. This amount won’t even recoup the estimated $4 billion loss that states will suffer due to the dividend tax cut. That leaves nothing to help the states deal with pressing budget deficits, which require an estimated to $60 to 75 billion to prevent program cuts and tax increases this year. (By contrast, the Mishel plan would give $85 billion to the states.)

2. It should be fiscally responsible- and not worsen deficits in the long run.

The cost to the US treasury of Bush’s tax proposals would add well over $700 billion to deficits over the next ten years. (The Center on Budget and Policy Priorities notes that the total figure far exceeds $700 billion because of the higher interest payments on the debt the Treasury would have to make.

The Bush plan would worsen Federal deficits in every one of those years- but without much budget impact in the first year, when stimulus is really needed. But it would not stop after 10 years. The cut would be permanent, worsening budgetary problems far into the future, undercutting needed public investments in education, health care, housing, or homeland security and making it difficult to achieve a budget balance without cutting important programs.

Permanently increasing future deficits as the Bush proposal would do would have a corrosive effect on the economy. Economic research shows that sustained budget deficits reduce national savings, which results in less investment and ultimately lowers the nation’s income in the future.

It makes sense to increase the deficit during the present period when the economy is weak in order to fuel economic growth, but not after the economy has recovered. With the huge costs that will result from the 2001 tax cut, the baby boomers’ retirement, and the war on terrorism facing the nation in the years ahead, it is irresponsible for the president and congress to pass a plan that would institute new, permanent claims of this nature on the budget.

3. It should take effect immediately.

According to the Center on Budget and Policy Priorities, more than 90 percent of the impact of the elimination of the taxation of dividends would not occur until after 2003, by which time the economy is expected to have recovered from the current downturn.

It will take until mid-year before it is clear what parts of the Bush plan- or alternative plans -will pass, especially given the fact that Bush chose to avoid a bi-partisan plan to start with. If Bush had presented a plan for aid to the states at a significant level, like that proposed by House Democrats (at least $30 billion in 2003), it would have sent a very powerful message to the states. Instead, most states will proceed with budget cuts and tax increases, producing a quick contractionary impact on the national economy.

Acceleration of individual tax cuts might begin to have some impact on take home pay in the later half of 2003, if withholding rates were to be changed almost immediately after tax cuts were passed. But remember, most of these tax cuts go to the wealthy and they are unlikely to change spending patterns. And individual tax cuts stimulate the economy only if they are spent in the marketplace.

As for eliminating taxes on dividends, even the strongest supporters of this policy change have a hard time explaining what, if any, stimulus effect it may have.

4. It should be fair- instead of tilting the tax code to favor the rich.

According to Citizens for Tax Justice, the wealthiest 1 percent of taxpayers, those who make over $356,000 a year, will get almost 50 percent of the benefit of eliminating the tax on dividends and 45 percent of the money from accelerating the personal rate cuts.

The 80 percent of the households making less than $73,000 a year would get less than 10 percent of the new tax breaks.

Data from the Tax Policy Center show that in 2003, close to 60 percent of the tax cuts would go to the top 10 percent of taxpayers.

Those making more than one million dollars a year would get at least $24,000 in tax cuts per year, while people earning $40-50,000 would get $76.

In a new analysis released January 7, Robert Greenstein of the Center on Budget and Policy Priorities said states and working-poor families would likely be immediate losers.

“States would lose because the dividend tax cut would cost state treasuries $4 billion to $5 billion a year, and the plan contains no offsetting fiscal relief. Working-poor families would lose because they would receive no tax cuts (the plan fails to accelerate the components of last year’s marriage penalty relief and child credit expansion that focus on the working poor), and these families could be adversely affected by deeper state budget cuts and higher interest rates.”

Greenstein noted that “while the plan contains middle-class tax cuts, they are temporary. The middle-class tax cuts simply accelerate tax cuts already enacted. By contrast, the most affluent Americans would receive a lavish new tax cut that is permanent, the elimination of taxes on corporate dividends.” He added “over time, middle-class families could be net losers. There is no ‘free lunch,’ and these tax cuts ultimately would have to be paid for, either through higher interest rates and slower economic growth caused by swollen deficits or through budget cuts, most likely in programs for the middle class and the poor.”

See the CBPP’s Assessment of President Bush’s Plan for Economic Stimulus, 1/7/03, 3pp.

5. It should target unmet needs.

Accelerated funding for building schools, improving our health care and transportation systems, making necessary investments in homeland security, and other needed investments would have an immediate impact on creating jobs and stimulating growth. The Bush plan does nothing in this direction. And, if passed, it would make it much harder to ever make necessary investments in long-deferred unmet needs.

After Reagan’s so-called “supply side” tax cuts ran up trillions of dollars in Federal debt, the country spent another decade digging out, by cutting back- or foregoing needed new spending -on important domestic investments. We cut back spending on relieving child poverty, on education, health care, science and technology, energy and transportation infrastructure, and environmental cleanup. At the turn of the century, when we finally got the Federal budget into surplus, we should have started to address all of these long-delayed “unmet needs.” Instead, President Bush pushed through more than a trillion dollars worth of tax cuts, mostly for the wealthy, and since then, he has been cutting spending and unrelentingly pushing more tax cuts for his elite friends. Enough is enough – if this newest tax cut package were to pass, this budget austerity would get even worse.

Without even producing an immediate short-term stimulus, Bush’s plan to permanently eliminate taxes on dividends would blow a permanent hole in the Federal budget for decades to come. Bush also wants to permanently cut taxes for the wealthy, permanently giving away a big chunk of the tax base. What this means is that Republicans and Democrats alike will find it virtually impossible to fund even promised new programs- even the relatively modest prescription drug plan that many promised the voters in November and required improvements in homeland security. But for decades to come- even during periods of economic growth -the Federal budget will be starved of resources and unable to address public investment needs. And failure to make these investments will make our country more economically polarized as a society and less efficient as an economy.

It is time for the American people to fight against this injustice and for a real plan that will stimulate the economy and create jobs.

Talking Points produced by the Campaign for America’s Future. For more information visit: www.ourfuture.org

Real Economic Stimulus Plans:
Lawrance Mishel, Economic Policy Institute: Generating Jobs and Growth: An Economic Stimulus Plan for 2003.

Center on Budget and Policy Priorities principles: Principles for Economic Stimulus.

AFL-CIO: Recovery for All, Not Just for Some: An Agenda to Create Jobs and Lift the Economy.

House Democratic Economic Stimulus Plan: http://democraticwhip.house.gov/media/releases/20030106-details.pdf

Senator Max Baucus (D-MT): http://baucus.senate.gov/~baucus/Press/02/12/2003106A00.html

Analysis and Comment on the Bush Plan:
Op-ed by AFL-CIO President John Sweeney in the Washington Post: http://www.washingtonpost.com/wp-dyn/articles/A19749-2003Jan6.html

Op-ed by columnist Paul Krugman in the New York Times: http://www.nytimes.com/2003/01/07/opinion/07KRUG.html

Statement by House Democratic Leader Nancy Pelosi: http://democraticleader.house.gov/media/releases/20030107-18-311983.asp

Analysis by Center on Budget & Policy Priorities’ Robert Greenstein: http://www.cbpp.org/1-7-03tax2.htm

Income distribution of proposed Bush tax cuts: http://www.ctj.org/stim03.pdf

Elimination of Dividend Taxation, including impact on the elderly: http://www.cbpp.org/1-6-03tax.htm

Impact on State Budget Crises: http://www.cbpp.org/1-8-03sfp.htm

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