More Tax Cuts

Some say that repeatedly doing the same thing while expecting a different outcome each time is the height of folly. Apparently, when it comes to the economy, the administration wants to do just this. If the first tax cut did nothing for the economy, then the solution must be…more tax cuts! And trust me, if there were a day of the year for me to be sympathetic to tax cuts, today is the day.

The CNN story says that Bush claims his tax cut would “create 1.4 million new jobs by the end of 2004”, and quotes him saying “We need tax relief totaling at least $550 billion to make sure our economy grows”. The election will be just in time to either call Bush on this claim, or reward him for his economic prescience. The version of the tax cut wandering around the Senate is for just $350 billion over ten years. All this while the 2004 projected deficit–without any accounting of war costs–is $300 billion.

Note that dividend tax cuts may have long run beneficial effects (see the links at the top of the sidebar), but they are certainly not a prescription for fiscal stimulus. In fact, dividend tax cuts are pro-cyclical. When times are good and corporate profits are high, low dividend taxes effectively put more money in the hands of investors. During a recession, when corporate profits are low, companies pay little or no dividends. So a dividend tax cut does very little to put more money in the hands of consumers qua investors during a recession. For that matter, eliminating the estate tax doesn’t do much to prop up spending during a recession either.