An Irrelevant Proposal
By PAUL KRUGMAN - NYT, January 7, 2003 - original
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 purιes!) 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?