Tax Experts Question Focus, Impact of Bush Recovery Plan

Author: Warren Rojas

Published: August 26, 2002

Though the White House remained tight-lipped last week about the administration?s plans for a new investment-oriented tax relief package, lawmakers and economists ran the proposals through the wringer and hung many of them out to dry.

President Bush got tongues wagging again on taxes after announcing two weeks ago that he was analyzing a slew of policy prescriptions that emerged from his August 13 economic forum in Waco, Texas. The tax initiatives topping the president?s list for the potential recovery package include: reducing and indexing the capital gains rates, raising the amount of capital losses that can be used to offset income from $3,000 to $20,000, ending the double taxation of dividends, and accelerating the increased contribution limits for 401(k) and other retirement savings vehicles. White House Council of Economic Advisers Chair R. Glenn Hubbard said midweek that Bush has made no final determination on the size, shape, or even the absolute need for the suggested investor-friendly tax breaks.

"He has not made any decision . . . whether to do or which to do," Hubbard told reporters at the Foreign Press Center in Washingt on. When pressed about why the administration was leaning toward savings incentives instead of promoting consumer spending - which is what most economists agree has kept the economy from capsizing entirely - Hubbard said the tax proposals being discussed could deliver a dual fiscal benefit.

"Most of the ideas that have been talked about lately would promote long-term risk-taking," he said of the tax relief proposals. "I see these very much as pro-recovery and pro-long term growth."

A spokeswoman for House Ways and Means Committee Chair William M. Thomas, R-Calif., said many of the investment tax ideas "were on the leadership? s radar screen" before the August recess, but suggested that Thomas would likely hold off on outlining a final package until after consulting with House Republican taxwriters.

Brookings Institution senior fellows William G. Gale and Peter R. Orszag, however, hope lawmakers will think long and hard before they attempt to jump start the economy with far-reaching tax policy changes.

According to Gale and Orszag, the administration?s knee-jerk reliance on tax reductions as an economic panacea was setting "a dangerous precedent" by numbing taxpayers to the consequences of risk. "I don? t think taxes are the answer here," Gale said during a conference call sponsored by the Center on Budget and Policy Priorities. "I?m still not convinced that the case for federal stimulus is there," added Orszag.

The pair suggested that having the administration insulate investors from the blow of their recent market losses by instituting "off-the-shelf" Republican tax favorites would fly in the face of the admi ni st ration? s mantra of late that individuals should be held accountable for their own actions.

"Do it at this point and it comes across as a bail-out," Orszag said of the proposed tax breaks.

Activate the Tax Cut Beacon

Beyond sending the wrong message about the stock market, both Gale and Orszag argued that the administration?s tax proposals were flawed because:

• (1) they are poorly designed as short-term stimuli, providing incentives for savings rather than increased consumption;
• (2) raising pension plan contribution limits would have no effect on overall retirement savings because only those individuals already packing away the most money would benefit; and
• (3) cash-strapped states would be forced to propose even higher budget cuts or tax increases to offset the additional losses from another round of federal tax cuts.

"The proposals are not well targeted toward any well defined goal," Gale said. He asserted that a better way to tackle the economic uneasiness would be to push for more transparency from financial institutions, extend unemployment benefits for struggling workers, pump additional federal aid to the states, and expand and make permanent the new pension-oriented SAVER credit.

Orszag dissected the individual tax changes and claimed that many could have a reverse effect on the economy and drive the stock market down even further. Expanding the capital gains loss limitation, for instance, he said, could promote a rapid sell-off of plummeting stocks by investors eager to reap the maximum benefit from whatever loss limit (GOP leaders have talked about doubling the limit to $6,000 while Bush has entertained going as high as $20,000 per year) is ultimately settled on.

Orszag said preliminary estimates compiled by the Urban-Brookings Tax Policy Center model show that expanding the loss limit to $6,000 could cost up to $1.5 billion per year and that half the relief would go to taxpayers with annual earnings above $100,000. Similarly, Orszag said offering a 50 percent dividend deduction to individuals for their corporate holdings could cost up to $22 billion in 2003, while a $1,000 exclusion could cost up to $4 billion for next year. He noted that the Joint Committee on Taxation has estimated that cutting the capital gains rate from 20 percent to 15 percent would cost around $50 billion over 10 years.

Gale said he might endorse raising the current capital loss limit if lawmakers would consider offsetting the boon by abolishing the preferential 20 percent rate for gains and taxing them at the ordinary income rates, but predicted he would find few Republican supporters for the tax tweak.

Both Gale and Orszag cautioned congressional leaders to avoid the temptation of slapping together a fiscal gift for poll-bound voters without weighing the severity of the long-term budget ramifications.

"I would rather forgo any spending plan if the cost is any of these provisions," Orszag said of any potential bipartisan measure. "Nothing is better than this," concurred Gale.

Lingering in Limbo

Democrats have customarily painted capital gains reductions as a GOP give-back to corporate contributors and wealthy taxpayers, a characterization Republicans have largely been unable to shake. Now that budget deficits have returned to Washington, Senate Republicans are finding it even more difficult to secure the 60 votes needed to get tax cuts through the chamber.

While he considers Bush?s ideas to be "very good tax policy," a spokeswoman for Senate Finance Committee ranking minority member Charles E. Grassley, R-Iowa, said Grassley firmly believes that Republicans should not "tee up an easy demagogue" for Senate Majority Leader Tom Daschle, D-S.D., by pursuing tax cuts for upper-income earners.

According to the Grassley aide, if lawmakers were able to overcome the election year rhetoric, the lack of financial resources, and the limited number of working days in the session and agree on a new stimulus deal, the package should focus on delivering relief to wage earners over Wall Street. "He?s said if anything at all gets done," the Grassley aide noted, "it needs to be focused on making workers, not investors, whole."

The aide said staff were weighing the initiatives on the table according to their near-term fiscal impact and their ability to improve the code as a whole, but would likely wait for the administration to take the lead on the issue.

"These ideas are a step in the right direction," the Grassley spokeswoman said. "We?ll wait to see which ones the President endorses and hope Congress will act to further pump up our bumpy recovery."

Earlier in the week, White House economic point man Lawrence Lindsey said on CNN?s "Novak, Hunt and Shields" that although Con gress is facing a "clogged legislative agenda" this fall, the administration was still concerned about the need to free up capital throughout the economic strata. "We have a tax code that is far too complicated, that overtaxes savings, that overtaxes investment, and we need to make adjustments in that," Lindsey said. "We need tax simplification and we need lower taxation of capital on all fronts." Senate Budget Committee member Jon S. Corzine, D-N.J., said on CBS?s "Face the Nation," however, that Democrats could not endorse another round of tax cuts for wealthy Americans without addressing the expansion of the federal budget deficit " a situation he blames on last year?s $1.35 trillion tax cut legislation (P.L. 107-16).

Corzine said that the latest investment tax changes should be discussed only within the context of a fiscal overhaul of the administration?s long-term tax strategy. "It?s time to have a legitimate bipartisan discussion about how we et this economy back on the right track," he said.

Whatever the White House decides, House Republican Conference Chair J.C. Watts Jr., R-Okla., suggested they do it soon if there is to be any hope of completing a package before Congress adjourns for the year. "If we?re going to do something, we?re going to have to hit the ground running," Watts said, adding as a caveat, "but remembering that we have more time than money."

No Time Like the Present

According to Senate Budget Committee Chair Kent Conrad, D-N.D., the budget deficit has made the decision about locking in any additional tax cuts simple for both the White House and the Congress: the answer is no.

New estimates from the Senate Budget Committee Democratic staff released August 22 showthat the 2003 deficit could reach as high as $190 billion and that balanced budgets will remain out of reach until 2009.

"There is simply no escaping the fact that the largest single factor causing the drop in surplus over the 10 years is the tax cut," Conrad said in a release. "In light of the growing costs for homeland security and the war on terrorism, the President?s call to make all of the provisions of his tax cuts permanent - including those benefiting the wealthiest that have not yet taken effect - could not be much more irresponsible and short-sighted."

According to the CBO?s August budget review, the 2002 deficit has grown to $157 billion - $111 billion more than the $46 billion predicted last March. The Office of Management and Budget predicted a deficit of $165 billion for the year in early July. The CBO is expected to release its summer reestimates on August 27.

Deficit or not, Lindsey renewed his pitch early last week for the administration?s plans to add individually controlled private accounts to Social Security. The reworked retirement program would allow retirees to divert up to 2 percent of their Social Security contributions to private accounts.

Democrats have denounced the privatization plan as being economically risky - particularly in light of the recent stock market decline - and claim that moving toward the new system would cost around $1 trillion over the next decade. Lindsey said that reinforcing the Social Security system with the private accounts would both plug the widening deficit gap for the retirement program and save almost $3 trillion over the long term. "The bottom line from what the Social Security Administration said, is that right now we have an actuarial hole in Social Security of something like $4 trillion [and] the plan that the commission recommended would eliminate that hole," he said. "If you can improve the balance sheet of the federal government by $4 trillion, there?s no trouble in temporarily borrowing money to do that."

Gale said the combination of the administration?s new-found desire to save investors from themselves and its plans to expose Social Security holdings to the ebb and flow of the markets would compel the government to rush to the rescue of America?s retirees every time stocks take a tumble.

"Imagine how intense the pressure would be to bail out investors if the stock market decline had occurred after funds had been invested in private accounts," he said.

Full Text Citations

• Press release from Joint Economic Committee Chair Jim Saxton, R-N.J. Doc 2002-19449 (1 original page); 2002 TNT 163-39
• Senate Budget Committee release regarding new federal budget estimates. Doc 2002-19511 (2 original pages); 2002 TNT 164-19
• Center on Budget and Policy Priorities report examining President Bush?s new stimulus package proposals. Doc 2002-19514 (3 original pages); 2002 TNT 164-27
• Brookings Institution report "A New Round of Tax Cuts" by economists William G. Gale and Peter R. Orszag. Doc 2002-19601 (9 original pages);

Photo of President Bush with caption: Among the leading candidates for inclusion in a economic stimulus package of investor-oriented tax breaks that President Bush is now considering are proposals that would reduce and index the capital gains rates, increase the amount of capital losses that can be used to offset income from $3,000 to $20,000, end the double taxation of dividends, and accelerate the increases in contribution limits for retirement savings vehicles.