Paul L. Caron
Dean



Tuesday, May 21, 2013

Bartlett: The Bush Tax-Cut Failure

New York Times:  The Bush Tax-Cut Failure, by Bruce Bartlett:

Ten years ago this month, Congress enacted the third major tax cut of the George W. Bush administration. Its centerpiece was a huge cut in the tax rate on dividends. Historically, they had been taxed as ordinary income, but the Bush plan, enacted by a Republican Congress, cut that rate to 15 percent. The tax rate on ordinary income went as high as 35 percent.

This initiative originated with the economist R. Glenn Hubbard, who had been chairman of the Council of Economic Advisers when the proposal was sent to Congress. Mr. Hubbard was a strong believer that the double taxation of corporate profits – first at the corporate level and again when paid out as dividends – was a major economic problem. ...

In an op-ed article in The Washington Post on Nov. 16, 2001, he predicted that the soon-to-be-enacted 2002 tax cut, which President Bush signed on March 9, 2002, would “quickly deliver a boost to move the economy back toward its long-run growth path.”Mr. Hubbard predicted that it would create 300,000 additional jobs in 2002 and add half a percentage point to the real gross domestic product growth rate.

There is no evidence that the tax cut had any such effect. The unemployment rate remained above 5.7 percent all year, rising to 5.9 percent in November and 6 percent in December. The real G.D.P. growth rate fell each quarter of 2002, and by the fourth quarter growth was at a standstill. Hence the need for yet another big tax cut. ...

The Treasury Department issued a fact sheet on July 30 asserting that the decline in dividends had been a cause of the weak stock market and noting that dividend payouts had risen since enactment of the tax cut on May 28. Subsequent research, however, found that the increase in dividends was a short-term phenomenon and mainly at companies where stock options were a major form of executive compensation.

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Comments

My memory is dim, did something happen on 9/11/01 which may have affected what they would have hoped to have happened?

Posted by: Sandy P. | May 21, 2013 12:22:11 PM

Corporate managers have no incentive to pay dividends, and most stockholders would prefer to defer dividend income anyway (even at 15%). One alternative route to eliminate double taxation that should encourage payment of dividends: tax dividends at ordinary income, tax corporate profits at the highest rate in effect for individuals, but give corporations a dividend paid deduction (also, make dividend income UBI).

Posted by: Rob | May 21, 2013 3:21:14 PM

"My memory is dim, did something happen on 9/11/01 which may have affected what they would have hoped to have happened?"

INDEED, didn't a certain stock market bubble burst? It did. I recall a friend had a plumb job pioneering online gaming, and despite even Microsoft backing, it failed. The timing, after the dot com bubble burst, was simply wrong. My buddy lost his best software engineering job ever.

In an op-ed article in The Washington Post on Nov. 16, 2001, he predicted that the soon-to-be-enacted 2002 tax cut, which President Bush signed on March 9, 2002, would “quickly deliver a boost to move the economy back toward its long-run growth path.”Mr. Hubbard predicted that it would create 300,000 additional jobs in 2002 and add half a percentage point to the real gross domestic product growth rate.

"There is no evidence that the tax cut had any such effect. The unemployment rate remained above 5.7 percent all year, rising to 5.9 percent in November and 6 percent in December."

I also recall the MRC tracking the econ headlines of the time. Despite as good or better official results for Bush, compared with Clinton in his first term, the econ headlines in newspapers were 100 to 1, 50 to 1 more times negative.

Only by the summer of 2004 did this ratio "narrow" to a less absurd but still ridiculous 20 to 1.

So much for "objectivity" of the press.

Posted by: Orson | May 22, 2013 12:27:58 AM