The Anti-Growth Tax Plan

Reasons why President Bush shouldn't sign the $70 billion tax cut bill coming his way.

| Tue May 16, 2006 2:00 AM EDT

Article created by the Center for American Progress.

There are a lot of arguments to explain why President Bush should not sign the $70 billion tax bill that Congress passed this week. One is that it permanently locks us into deficit spending. But as Vice President Cheney famously remarked a few years ago, “Reagan proved deficits don't matter.”

Another argument is that the tax cuts are squeezing out needed spending for high priority domestic programs. But in reality this administration is “transforming” government in a manner that will convince even the most hardened liberal not to invest tax dollars in it.

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Finally, one can point to the distributional effects of the tax cut. Nearly all of the benefits of this tax cut go to the wealthiest segment of the population, the only segment that has enjoyed income growth over the past five years on either a pre-tax or after-tax basis. But anyone who is even halfway observant knows that the war between the classes is nearly over and there is no point in choosing the loser.

So what argument should one use? Try this: The recently passed tax package is anti-growth! That may be the exact opposite of what the President and Congressional Republicans claim, but take a look at the facts.

When the federal government decides not to tax the portion of personal income that comes from dividends it increases the value of companies that pay dividends to their shareholders. That, according to the administration, encourages more money to flow into the stock market, which in turn generates more business capital and greater economic growth.

But the truth is that business investment is necessarily constrained by savings, so when government gives tax breaks and then turns around and borrows money to cover the loss of revenue resulting from the tax breaks, no savings has been created. What we have instead is a market that has been tilted toward companies that pay dividends and particularly those that pay high dividends.

The tax bill before the President provides a clear incentive to move money away from non-dividend stocks and low-dividend stocks into stocks that pay higher dividends. The problem: Companies that pay dividends grow more slowly than those that don’t; and companies that pay high dividends (the ones made significantly more attractive by the tax bill) grow more slowly than those that pay more modest dividends.

The effect of the tax legislation on its way to the president is to reduce the capital available to businesses that are expanding and creating jobs and move it to older mature companies that have little else to do with the cash other than to pass it back to shareholders in the form of dividends.

A large portion of high dividend companies had extremely low rates of growth. More than half of all large companies paying dividends of 4 percent or more grew by less than 5 percent a year. And most of the others grew at rates only slightly greater. Fewer than 30 percent of companies that paid no dividend grew at that pace.

Using tax policy to shift the flow of investment dollars away from companies that have the greatest and most productive use of capital will over time rob the economy of jobs and the nation of wealth. It may be a boon to the executives of big companies in certain sectors of the economy, but nearly everyone else loses. This is one tax cut that is clearly not worth borrowing money from the next generation to pay for.