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Hoosiers played chief role in tax cuts
by Teresa Ghilarducci May 28, 2003
We Hoosiers have a lot to account for. The Senate approved the Bush Administration’s bold proposal for our nation’s third largest tax cut; the largest was passed in Bush’s first year. Vice President Dick Cheney broke a tie vote to save one of the most controversial aspects of the bill: its dividend tax cuts. Critics point out that those provisions gave Cheney $107,000 in tax savings. This isn’t business as usual; this tax cut is quite unusual. It is the first time the nation has cut taxes while waging war. It is the first time Federal Reserve President Alan Greenspan and most economists agree on the prediction that the tax cut will not help us get 6 million people back to work. It is the first time Wall Street’s support for such a boon to their wealthy customers is tepid to cold. A report from the prestigious business-consulting firm McKinsey Co. notes that most stock dividends (61 percent) are in tax-sheltered accounts, so that a dividend tax cut will likely not boost share prices. Corporations, which predominately support Republican agendas, are unusually critical of this tax cut and are vocally worried that when the government shops loans to pay for the growing deficit — a record $300 billion which just includes the effect of the first Bush tax cut — interest rates will soar. Greenspan estimates interest rates on corporate borrowing (as well as mortgages) will increase by over 1 percentage point. Even the Republican-dominated budget watch dog group, the Concord Coalition — a darling of the Reagan Administration — has joined Bush detractors to not only oppose these tax cuts but to support rescinding the 2001 tax cuts. Finally, it is not the grass-roots that is clamoring for a tax cut; only 29 percent of Americans polled think a tax cut ranks first among ways to stimulate the economy. The president invokes economic theory to support the tax cuts and the unprecedented deficit. However, if the typical economist had free reign over tax and spending decisions, she or he would focus like a laser on the looming fiscal deficits in Medicare and Social Security. The economist would also make sure state and local government deficits wouldn’t stunt investments in human capital (education) and maintenance of infrastructure, roads, etc. Without this spending we sacrifice the basis of future growth. The magic of compound interest works in reverse — if we don’t fund the future debt now, the deficit will grow at increasing rates. The current proposed $330 billion tax cut — which is likely to be over a trillion dollars when it becomes permanent — together with Bush’s first $1.3 trillion tax cut concretely saves most Americans about $100 per year for the next 10 years. But it saves over $100,000 a year for the top 1 percent, the million or so families that have annual incomes over a million dollars. In contrast, repealing the tax cuts would pay for most of the Medicare and Social Security projected debts, make up for the state and local government shortfalls and give the extra $80 billion the Defense Department wants. Tax cuts mean the next generation will pay more taxes when these loans come due. So, the tax cuts don’t particularly make the public happy, or corporations, or Wall Street, or economists, or Greenspan. So who’s happy? The president supports it; he is laser-focused on this one policy. He asserts that it is unfair when corporate profits are taxed twice, once at the corporate tax rate and again when the shareholder gets the dividends. But many companies pay little or no tax, and all but the wealthiest taxpayers have their stock dividends sheltered in retirement accounts. Much of the nation’s profits are never taxed even once. This tax cut came chugging into the station because wealthy households are more likely members of the president’s party and the wealthy are the only winners in this bill. Republican senators and House members desperately want campaign help from a Republican National Committee that demands party loyalty. Last week, a 15-minute speech by President Bush raised $22 million for the next elections. But party politics doesn’t fully explain why we were handed these enormous tax cuts. This tax cut bill passed the Senate the first time not because of Dick Cheney’s vote but because three Senate Democrats voted for it, and one of them was Indiana’s junior senator, Evan Bayh. (To his credit, Bayh voted against the final bill and Cheney had to break the tie.) Moreover, the chief architect of their tax proposal is Bush’s retiring budget director, Mitch Daniels, who hails from Indiana and reportedly wants to be Indiana’s next governor. At least Mitch Daniels will run as a Republican, unlike Sen. Bayh. Even a Republican senator, Ohio’s George Voinovich, stipulated his support on giving relief to the states. Indiana desperately needs federal assistance to implement Bush’s “Leave No Child Behind” education program and to prevent cuts in medical services to Indiana’s young and old. Evan Bayh voted for the tax cuts for the nation’s richest families, but only a few of those live in Indiana. Nonetheless, Hoosiers played a more decisive role in this unhealthy tax cut than we would think. Teresa Ghilarducci is an associate professor of economics and the director of the Higgins Labor Research Center at the University of Notre Dame.
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