Summit sparks ideas to recharge economy

Posted: Monday, August 26, 2002

When President Bush held his economic summit... it was widely dismissed, by liberals and conservatives alike, as a photo-op heavy on I-feel-your-pain symbolism and light on substance.

But that verdict may have been premature. The White House ... said that as a result of the summit, it is considering a package of investor tax cuts and deductions designed to boost a sluggish economy and shore up a sagging stock market.

That's not just smart economics. It's prudent politics. With more than half of all Americans now owning individual stocks or stock funds, there's a sizable investor class in the electorate that is concerned about the declining value of its 401(k) plans and IRAs.

Democrats reacted with predictable skepticism, arguing that the government can't "afford" to cut taxes any more while the federal budget is running a deficit. When the Congressional Budge Office recently forecast a $165 billion deficit this year, Democrats were quick to blame the president's $1.35 trillion tax cut passed last year as the reason for the red ink.

But that's disingenuous. The full tax cut is to be phased in over 10 years. In the calendar year 2001, tax rates were reduced across the board by a measly 0.5 percent; in 2002 and 2003 they will drop another half percent. Eventually each rate will be reduced by 2.5 percent, and this year a new 10-percent rate will replace the current 15 percent. In other words, the Bush tax cuts have been so minuscule that their impact on federal revenues is akin to bailing out the ocean with a teaspoon.

The real culprit behind the returning deficits is skyrocketing federal spending, and it's blame that deserves to be shared by both parties.

The CBO reports that for the first 10 months of the current fiscal year, nonmilitary discretionary spending has already increased $80 billion over last year. For the fiscal year ending Sept. 30, overall spending will likely be up more than 15 percent, on top of 11 percent the previous year.

Nondefense federal spending as a percentage of the nation's Gross Domestic Product increased from 13 percent in 2001 to 15 percent in 2002. By comparison, federal individual income taxes as a percentage of GDP decreased from 9.8 percent in 2001 to 9.2 percent in 2002. Clearly, spending is increasing at a much, much faster rate than taxes are being cut. ...

(I)t's imperative for Washington to implement policies that encourage investment and business growth.

Unfortunately, one of the best methods for stimulating the economy -- accelerating the implementation of the Bush tax cuts -- is probably a political nonstarter. But there are other ways to spur growth and soothe middle-class investors.

One such idea the Bush administration is floating is to cut taxes on dividends for businesses and individuals. ...

Why not allow dividend payouts to be deducted from corporate income taxes? Or make dividends exempt from individuals' income taxes? Either method would encourage the taking of dividends, thus spurring investment and perhaps making for better corporate management by holding businesses accountable for the profits they claim to have earned.

The administration should also pursue cutting the capital gains tax, which will stimulate investment; increasing 401(k) contribution limits to allow people to make up for losses in their retirement accounts; and increasing the amount of losses investors can deduct on their tax returns. ...

Prior to his economic summit, President Bush had been too cautious in the face of mounting economic problems, so it's good to see him finally propose some solutions to the nation's sluggish growth. These are policies that, if Congress enacts them, will benefit not just Wall Street, but also Main Street, and help sustain the economic recovery.

-- Savannah Morning News



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