Bush’s economic team faces challenges

Sanjay Paul

Green Bay Press-Gazette
March 10, 2003

During a CNBC talkfest, Treasury Secretary John Snow’s attention was drawn to recent polls showing a glaring lack of confidence in President Bush’s economic team. Don’t the unfavorable numbers, asked the talk show host, make his (Snow’s) job of selling the Bush tax-cut package all the more difficult?

Snow, displaying remarkable agility for one only recently inducted into the administration, ignored the question altogether. He also brushed off the dismal poll numbers, suggesting guilelessly that the public was uninformed. Once Americans came to learn about the growth-promoting elements of the package, assured Snow complacently, the poll numbers would redound to the economic team’s credit.

Team in disarray?

Perhaps. But in the meantime, Bush’s economic strategy appears to be in disarray, with his economic team itself bedeviled by a plethora of departures.

A few weeks ago, Bush proposed to advance income-tax reductions, expand the child tax credit, and reform Medicare. The package, with an estimated price tag of $674 billion over 10 years, immediately attracted criticism from foe and friend alike.

Democrats excoriated Bush for crafting policies intended to benefit the affluent, while Republicans averse to government profligacy recoiled at the prospect of large budget deficits stretching inexorably into the future. Most controversial of all was the proposal to eliminate individual income taxes on dividends, a measure that alone threatened to reduce the Treasury’s revenues by $360 billion over the decade.

On the defense

The Bush economic team is gamely defending the proposal, albeit in a curiously Keynesian fashion. The elimination of taxes on dividend income, they assert, will increase the disposable incomes of stock holders who will then proceed to spend it on goods and services, thus providing a much-needed fillip to an enervated economy. Moreover, they argue, the prospect of greater after-tax returns on stock holdings will lead to higher stock prices, thus raising the stock market from the abysmal depths to which it has descended in recent months.

What they fail to mention is that affluent taxpayers, who are the principal beneficiaries of any dividend tax cuts (since they own most of the stocks and thus earn most of the dividends), are unlikely to spend much, if any, of the increase in their incomes. Furthermore, the valuations in the stock market quite possibly already reflect the effect of the proposed cut in the dividend tax and are thus unlikely to rise significantly following the implementation of the tax-cut policy.

In recent testimony to Congress, a surprisingly blunt Alan Greenspan questioned the necessity of the Bush tax package.

The task ahead for the Bush economic team is clear.

If Bush is serious about seeing his tax cut package implemented, his chosen men (they are all men) will have to persuade a skeptical Congress and an equally unconvinced public about its merits.

Sanjay Paul is associate professor of economics at Elizabethtown College. He lives in Hershey, Pa. E-mail him at columns@greenbaypressgazette.com.

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