April 1, 2003

April 1, 2003 | Commentary on Smart Growth

Tax Cuts Benefit Economy

"We've never cut taxes in time of war," Sen. Max Baucus, D-Mont., said last week as he voted to halve President Bush's tax-cut proposal. Even if that were true - the Kennedy tax cut, for example, dropped the top marginal rate to 70% from 91% and took effect during the early stages of the Vietnam War - it's still no argument against cutting taxes now.

Indeed, it makes sense only if you believe that tax cuts simply extract money from the economy. If they did, then it would be a bad idea to reduce our collective income just as our expenses were set to rise. But a tax cut that encourages long-term growth by making it cheaper for people to invest - and a dividend tax-cut would do that in spades - is exactly what our fragile economy needs, even (perhaps especially) in time of war.

Yet the dividend portion of the president's plan is just what congressional tax-cut opponents are targeting. Many would prefer a temporary, "fiscally responsible" tax cut instead. But that idea already has been found wanting: The $300 and $600 rebates mailed in 2001 were a sop to this way of thinking, and they did nothing to boost the economy.

We should never try to induce consumer spending at the expense of our long-term economic health. As a new analysis of the president's budget by the Congressional Budget Office notes, encouraging higher government spending and private consumption hurts economic growth in the long term. By focusing instead on pro-growth tax cuts, lawmakers can ensure a quicker and smoother economic recovery.

A dividend tax cut is an excellent way to do this. Such a cut is why the president's plan would lead to more business expansion and more jobs - an annual average of 914,000 more jobs during the next five years, a recent analysis by the Heritage Foundation found.

It stands to reason that when individuals are faced with job and war uncertainties, providing them with one-time tax rebates will do little to change their outlook, and it's outlook that drives behavior - how much people save, spend and invest. That's true whether or not we are at war.

-Norbert Michel is a policy analyst in the Center for Data Analysis at the Heritage Foundation, a Washington think tank.

Originally appeared in USA Today, April 1, 2003.

About the Author

Norbert J. Michel, Ph.D. Research Fellow in Financial Regulations
Thomas A. Roe Institute for Economic Policy Studies