"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.
