The Politics of Portfolios [NYT]
By RICHARD W. STEVENSON
WASHINGTON, Jan. 6 — In calling for the elimination of taxes on stock dividends, President Bush is embracing the idea that the financial health of investors, particularly the millions of people who got into the stock market for the first time over the last decade and are now suffering the consequences, will be vital both to renewed prosperity and to his own electoral success.
It is a gamble on both counts.
For all that is said of Wall Street as an important barometer of economic activity and national psychology, it is not clear that putting more cash in the hands of investors and trying to give the market a lift will provide much help to the economy in the short run, economists said.
Similarly, it is a matter of intense debate among political analysts whether investors make up a definable voting bloc that can be won over with a break on investment income or even a boost to the value of depleted portfolios. Some of Mr. Bush's Democratic critics even question the existence of a so-called investor class as anything other than an excuse for Republicans to cut taxes again for the wealthy.
For years, some Republican strategists have made a case that their party has an opportunity to attract the millions of middle-class people who make up the new investor class by emphasizing that its agenda of lower taxes, less regulation and more trade will be good for their efforts to build wealth. About half of all households now have some investments in stocks and bonds, either directly or through mutual funds and retirement accounts.
More important in political terms, about two-thirds of voters are investors, making the stock market an increasingly compelling subject — especially with stock prices having just completed their third consecutive year of losses.
"Bush is responding to Americans where they were hit hardest," said Frank Luntz, a Republican pollster. "Usually when you think of the economy getting worse, you think about unemployment, but this time it's stock-market driven. He has provided a tax relief package that will affect more voters than almost anything else he could have done. It will matter to them because they haven't seen their incomes go down, they've seen their retirement savings go down."
But some of the administration's critics dismiss the entire notion of a mass investor class. To the degree that anyone cares about taxation of dividends, Democrats said, it is a thin slice of the very richest Americans who are already the Republican party's patrons rather than the average working families that determine the outcome of elections.
For all that investing became the national pastime when the market was rising, they said, stock market wealth is still so concentrated that Mr. Bush's proposal is nothing more than a new way of justifying tax cuts for wealthy Republican benefactors. They said the focus on dividends came about because other options appealing to conservatives, like corporate tax cuts, became politically problematic for the White House in the aftermath of last year's corporate accounting scandals.
"This is so flagrant," said Kevin Phillips, a political commentator and the author of "Wealth and Democracy: A Political History of the American Rich."
"It's not aimed at the little investor," Mr. Phillips said of the Bush plan. "It's aimed at the big investor and shrouded by a fog of phoniness. This isn't even trickle-down economics. It's mist-down economics."
Eliminating taxes on dividends paid by corporations to their shareholders would amount to a tax cut of around $300 billion over the next decade, roughly half the total value of the economic plan Mr. Bush intends to unveil on Tuesday.
In remarks to reporters after a cabinet meeting at the White House this afternoon, Mr. Bush cast his proposal on dividends as a potent way of getting the economy firing on all cylinders. Anticipating a rising chorus of Democratic charges that the Bush plan benefits only the wealthy, the president and his spokesman said the plan would help not only the economy but also a broad swath of the public.
"It will encourage investment, and that's what we want," Mr. Bush said. "Investment means jobs."
But he also said the change would be a matter of fairness, both in economic terms and for individuals, including many retirees, because it would end the practice of taxing dividend payments made by corporations to their shareholders after the same money has already been taxed as profit.
"There's a principle involved," the president said.
Ari Fleischer, the White House spokesman, said today that there were 35 million people who received dividend income, including 10 million elderly people. "The president does not think it is right to tax savings and to penalize people who save, and the president does not think it is right to penalize people who plan for their future," Mr. Fleischer said.
Responding to a question about whether Mr. Bush's proposal spread its benefits fairly among income groups, Mr. Fleischer responded that the president's plan would contain elements "that will help lower taxes for all Americans, give a boost to the economy, give a boost to growth."
Although White House officials have in the past estimated that eliminating the tax on dividends could send the stock market rising by as much as 20 percent — the Dow rose 171.88 points, or 2 percent, today — Mr. Fleischer said it was "impossible to predict any kind of stock market performance based on announcements out of Washington."
But some liberal analysts said an investor class, at least as a mass phenomenon, was a political marketing myth. The Center on Budget and Policy Priorities, a liberal research group, cited an analysis of Federal Reserve data today showing that 85 percent of the value of stocks and bonds was held by the top 10 percent of the income spectrum in 1998, the latest year for which comprehensive data is available. Citing I.R.S. data from 2000, the group said 22 percent of taxpayers with incomes under $100,000 reported any dividend income, while 72 percent of filers between $100,000 and $1 million and nearly all filers above $1 million reported dividend income.
Mr. Bush's plan amounts to "an old, old Republican theory of trickle-down economics," said Representative George Miller, Democrat of California.
Democrats also tried to link Mr. Bush's actions to the corporate accounting scandals and political firestorm over the Securities and Exchange Commission last year. They said Mr. Bush would do better to grant a big budget increase to the commission and assure that the accounting oversight board would act aggressively to restore investor confidence.
"That's what will bring back confidence in the stock market," said Representative Robert T. Matsui, Democrat of California, "not some gimmick like dividend deduction."
nytimes.com
* * *
An Irrelevant Proposal
By PAUL KRUGMAN
Here's how it works. Faced with a real problem — terrorism, the economy, nukes in North Korea — the Bush administration's response has nothing to do with solving that problem. Instead it exploits the issue to advance its political agenda.
Nonetheless, the faithful laud our glorious leader's wisdom. For a variety of reasons, including the desire to avoid charges of liberal bias, most reporting is carefully hedged. And the public, reading only praise or he-said-she-said discussions, never grasps the fundamental disconnect between problem and policy.
And so it goes with the administration's "stimulus" plan.
Boosting a stumbling economy ("It's Clinton's fault!" shouted the claque) isn't rocket science. All a sensible plan must do is focus on the present, not the distant future; on those who are suffering, not on those doing well; and on those who are most likely to spend additional money.
Right now a sensible plan would rush help to the long-term unemployed, whose benefits — in an act of incredible callousness — were allowed to lapse last month. It would provide immediate, large-scale aid to beleaguered state governments, which have been burdened with expensive homeland security mandates even as their revenues have plunged. Given our long-run budget problems, any tax relief would be temporary, and go largely to low- and middle-income families.
Yesterday House Democrats released a plan right out of the textbook: aid to states and the jobless, rebates to everyone. But the centerpiece of the administration's proposal is, of all things, the permanent elimination of taxes on dividends.
So instead of a temporary measure, we get a permanent tax cut. The price tag of the overall plan is a whopping $600 billion, yet less than $100 billion will arrive in the first year. The Democratic plan, with an overall price tag of only $136 billion, actually provides more short-run stimulus.
And instead of helping the needy, the Bush plan is almost ludicrously tilted toward the very, very well off. If you have stocks in a 401(k), your dividends are already tax-sheltered; this proposal gives big breaks only to people who have lots of stock outside their retirement accounts. More than half the benefits would go to people making more than $200,000 per year, a quarter to people making more than $1 million per year. ("Class warfare!" shouted the claque.)
Even the administration's economists barely pretend that this proposal has anything to do with short-run stimulus. Instead they sell it as the answer to various other problems. (It slices! It dices! It purées!) Above all, it's supposed to end the evil of "double taxation."
Now lots of income faces double taxation, in the sense that the same dollar gets taxed more than once along the way. For example, most of us pay income and payroll taxes when we earn our salary, then pay sales taxes when we spend it. So why has it suddenly become urgent to ensure that dividends, in particular, never be taxed more than once?
That is, if they're taxed at all. In practice, the Bush plan would exempt a lot of income — rich people's income — from all taxes. Thanks to the efforts of lobbyists, today's corporate tax code has as many holes in it as a piece of Swiss cheese, and today's corporations take full advantage. Case in point: Between 1998 and 2001 CSX Corporation, the company run by the incoming Treasury secretary, John Snow, made $900 million in profits, but paid no net taxes — in fact, it received $164 million in rebates. This wasn't exceptional; the average tax rate on profits has fallen to a nearly 60-year low.
Anyway, even to debate the pros and cons of dividend taxation is to play the administration's game, which is to change the subject. Weren't we supposed to be talking about emergency economic stimulus?
No doubt the final version of the "stimulus" plan will contain a few genuine recession-fighting measures — a child credit here, an unemployment benefit there, a few crumbs for the states — for which the administration will expect immense gratitude. But the man in charge — that is, Karl Rove — is clearly betting that the economy will recover on its own, and intends to use the pretense of stimulus mainly as an opportunity to get more tax cuts for the rich.
Ideology aside, will these guys ever decide that their job includes solving problems, not just using them?
nytimes.com |
