The Tax Cut Trap

Let's see if we have this right. President Bush plans to propose a stimulus plan the centerpiece of which will have little or no stimulative effect. At a time when some people badly could use help, Mr. Bush's tax cut mostly will help those who need it least. And while the President is warning Congress to restrain its spending on basics such as education and aid to the poor, the tax cuts will further inflate his growing budget deficit. No wonder that Mr. Bush, even before officially unveiling the plan tomorrow, waved his magic "class warfare" amulet, seeking to obscure the obvious - another tax cut for the rich - by preemptively accusing his accusers.

The President's plan was still being formed over the weekend, but officials said it would likely include some repackaged aid to the states, which certainly would come in handy; a belated extension of unemployment benefits; and perhaps an acceleration of his previously approved reductions in income tax rates, also a boon mostly for the prosperous. But his big new idea is said to be an exemption from taxation of stock dividend income. The argument behind this, one that has been put forward for decades, is that such income is unfairly taxed twice: once when a corporation earns a profit, and then again when some of that profit is distributed to shareholders. There's an academic logic to this case, but then again economists can explain the pernicious effect on healthy economic activity of just about every kind of tax. The real question is whether, at this moment, the tax system should be changed in a way that further favors the rich over the poor and companies that distribute dividends over companies that don't, while costing the government tens of billions per year.

"I understand the politics of economic stimulus, that some would like to turn this into class warfare", Mr. Bush said last week. "That's not how I think. I think about the overall economy and how best to help those folks who are looking for work." The logic seems to be that a dividend tax exemption might lift the stock market, which might eventually encourage businesses or consumers to spend more, which might - somewhere down the road - "help those folks who are looking for work". That's a long road. With the economy actually growing, there's reason to question whether Congress should be trying for a stimulus at all, given the bluntness of the instruments available and the always uncertain elements of timing. But if lawmakers and the President really want to help those who are being squeezed, a temporary respite from a tax that workers actually have to pay - the payroll tax - would make more sense.

As always with his large tax cuts for the upper-income brackets, Mr. Bush prefers not to discuss long-term costs. Under his tenure the budget has swung with alarming speed from surplus to deficit. Part of the reason is a recession the President did not cause, and part is the increase in defense and homeland security spending he was right to seek. But part - an ever larger part going forward - is his unaffordable tax cut, the juiciest benefits of which go to America's wealthiest, and the effects of which this latest proposal would only compound. Meanwhile the President blithely ignores the impending wave of health care and retirement costs. As the year goes on, he will insist that Congress squeeze spending for highways, parks, schools, and other legitimate needs. If lawmakers want to avoid that trap in September, they should not let the President set it in February.