The Anti-Growth Tax Plan

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

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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.

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.

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WE'LL BE BLUNT.

We have a considerable $390,000 gap in our online fundraising budget that we have to close by June 30. There is no wiggle room, we've already cut everything we can, and we urgently need more readers to pitch in—especially from this specific blurb you're reading right now.

We'll also be quite transparent and level-headed with you about this.

In "News Never Pays," our fearless CEO, Monika Bauerlein, connects the dots on several concerning media trends that, taken together, expose the fallacy behind the tragic state of journalism right now: That the marketplace will take care of providing the free and independent press citizens in a democracy need, and the Next New Thing to invest millions in will fix the problem. Bottom line: Journalism that serves the people needs the support of the people. That's the Next New Thing.

And it's what MoJo and our community of readers have been doing for 47 years now.

But staying afloat is harder than ever.

In "This Is Not a Crisis. It's The New Normal," we explain, as matter-of-factly as we can, what exactly our finances look like, why this moment is particularly urgent, and how we can best communicate that without screaming OMG PLEASE HELP over and over. We also touch on our history and how our nonprofit model makes Mother Jones different than most of the news out there: Letting us go deep, focus on underreported beats, and bring unique perspectives to the day's news.

You're here for reporting like that, not fundraising, but one cannot exist without the other, and it's vitally important that we hit our intimidating $390,000 number in online donations by June 30.

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