Stimulus: Take Two

It would be foolhardy to expect Democrats and Republicans to agree on how best to stimulate the nation’s economy. So it came as no surprise that Democrats call President George W. Bush’s jobs and growth package “class warfare,” while Republicans claim the Democratic plan is merely a short-term fix.

The cornerstone of Bush’s $674 billion, 10-year package is a plan to eliminate double taxation on corporate dividends, which will benefit approximately 35 million American households. Currently the IRS taxes a company on its profits and then taxes investors who receive the profits as dividends. “We think [the plan] will bring a whole lot of benefits to the economy, not just in terms of the additional tax dollars it leaves in the economy but also because of the distortion it takes out of the tax system that is really harmful to the economy,” says Pamela Olson, assistant secretary for tax policy at the U.S. Treasury.

“But this isn’t supposed to be about tax reform,” argues Rep. Bill Jefferson (D-LA). “It’s supposed to be about stimulating the economy, which experts say should be temporary and have a stimulative effect. There are lots of things we can think of to reform the tax code, but this isn’t the time to do it.” Another problem, he says, is that the Bush proposal helps too few people, making it a hard sell for many senators in states like Louisiana where only 8% of the population would benefit from the dividend tax cut.

The central features of the Democratic plan are a $300 to $600 tax rebate and tax incentives for business expensing. In addition, it provides much needed support to states and localities for costs associated with homeland security, infrastructure, Medicaid, and other needs. “The tax rebate will result in some economic consumption among low-income people, and the expensing for businesses will have an immediate impact,” says Jefferson.

The price tag? Approximately $100 billion. “The idea is that what you get back for immediate stimulus is more economic activity and more tax to the treasury as long as it is not stretched out over time. The Republican plan stays around for a good long time, spending money that we don’t have.”

According to economist William E. Spriggs, executive director at the National Urban League Institute for Opportunity and Equality in Washington, D.C., the Bush plan is tilted almost entirely toward those at the top 10% of the income distribution, and operates under the premise that the economy isn’t functioning properly because corporations need help. “But productivity is growing at a very healthy rate, [which is why unemployment is so high,] and he’s trying to solve a problem that doesn’t exist,” he says. The national unemployment rate is at 6%, two points higher than it was in December 2002. The current rate of unemployment among blacks is at 11.5%.

Entrepreneurs and small businesses will probably see greater long-term benefits from certain of the administration’s proposals according to Colin Blaydon, a professor of business management at Dartmouth College’s Tuck School of Business