The Voodoo of Dubya-nomics

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Bush creates a straw man: the critic who says his plan "only helps the rich." The actual criticism is that it mainly helps the rich. The much smaller tax breaks for lower-income people are vital too. They provide cover and act as a bribe. For a few hundred dollars, the government buys your support for a plan worth millions to those who already have millions.

This is the traditional Republican supply-side aspect of Dubya-nomics: you help the poor by helping the rich. In particular, Bush justifies cuts in top-bracket tax rates by noting that they will benefit the small-business owner. That they will. But a lot of top-bracket taxpayers are not small-business owners. So even under the dubious premise that small-business owners are delicate flowers that must be fertilized with extra-rich tax goodies, a general tax cut for the rich is a weird way to go about it.

Bush also makes it sound as if small businesses currently get no tax deduction for anything they spend in excess of $25,000 a year on equipment. In fact, just like big businesses, they can depreciate as much new equipment as they wish. That means spreading the deduction over the years the equipment is helping produce income, under standard accounting principles. Allowing the immediate deduction of all those equipment costs amounts to a subsidy. Only small businesses get it.

The President's argument for eliminating the tax on corporate dividends — he is settling for a cap of 15%--is also disingenuous. Because companies pay the corporate income tax, taxing shareholders' dividends is "double taxation," he says. But the corporate income tax has brought in a declining share of federal revenue for decades, as corporations are granted deductions and discover loopholes. And if taxing the same income twice bothers the President so much, why doesn't he start with ordinary working wages, which are subject to both the income tax and payroll taxes for Social Security and Medicare?

Bush's other rationale for cutting the tax on dividends is that this would be good for the stock market. Share prices would rise, and millions of ordinary investors would have more money to invest or spend. This line of reasoning adopts another aspect of classic Keynesianism: the money illusion. The idea is that when people feel richer, they spend more, which helps the economy, which makes them richer for real. Today's conservative economists, when they are not serving in a Republican Administration, tend to be skeptical of such magic. They would say that unless investors are morons, which they aren't, a dollar added to the return on stocks (because the government has forgone a dollar of taxes on dividends) isn't going to raise the total value of stocks more than a dollar. In terms of bang for the buck, it's a costly way to go about a general economic stimulus. And though Bush emphasizes small investors, big investors will benefit most.

In a fascinating aside during his Albuquerque speech, the President mocked the "new economy," in which "folks said, Would you invest in my company, because the sky is the limit?" even though "nobody seems to be buying my product." The notion that pressure to pay dividends could reduce the risk of another stock bubble like the one that burst in 2000 is not crazy. But Bush's puritanical critique of the "new economy" is an odd fit with his central theme that we need tax cuts because it is too hard for entrepreneurs to raise capital. He describes the "new economy" as a world of easy capital for anyone with a song and dance, sustained by "pie-in-the sky pronouncements." Funny, it sounds a lot like the bill Congress placed on his desk last week.