"tax breaks for the rich"

[marbles]

Okay, we've had some time to digest Bush's tax proposal, so everyone should be educated enough.

It looks like the Dem's are going to stick with the position of "Bush's tax plan favors the rich." My question is, does anyone actually believe this? And if so, could you please support their position with some facts from the plan?

Here's how I understand the highlights of the Bush plan:
-No more taxing dividends
-Speeding up the reductions from the last plan
-Higher income tax credits to middle-class families w/kids

What am I missing?

[Chris Alger]

Of course cutting dividends favors the rich. Only about 22% of filers earning below $100K received dividend income, but more than 2/3's of those over this income level do. As a result, "more than 70 percent of the benefits of eliminating [the tax on dividends] will go to the wealthiest 5 percent of American taxpayers."[1]

The contrary arguments I've seen factor in the tax benefits to the working poor, which makes the overall plan slightly increase the percentage of the entire federal tax burden borne by the rich. But they'll still pay a lower tax and benefit to a much greater extent than the lower middle class.

[1]Ryan Lizza, "Wealthy Choice," The New Republic, 1/20/3

[patrick dicaprio]

a sample dialogue from teh Tom Daschle playbook:

q:what do you think about the war in iraq.
TD: it is a tax break for the rich

q: what about the show Joe Millionaire?
TD: it is a tax break for the rich.

q: what about raising a fourflush on the turn in holdem?
TD: it is a tax break for the rich.

Pat

[marbles]

Or one of my all-favorite Daschle quotes (word for word)

TD on oil in Alaska:
"It's this simple: We will not allow the Republicans to destroy the environment! (pound fist for effect)"

[marbles]

"Only about 22% of filers earning below $100K received dividend income, but more than 2/3's of those over this income level do."

--Please cite your source here. It was my understanding that virtually anyone with a penny in a well-diversified mutual fund receives dividend income. This includes most 401(k) plans, along with a lot of mutual funds owned by middle-class seniors.

Is the source including all dividend income (e.g. income to a mutual fund that you own as well as direct income to the shareholder), or just direct dividend income (shareholder receives a check directly from the company)?

[Clarkmeister]

Uhhhhh, he pretty clearly did cite his source.

[marbles]

Doh. My bad. I assumed the citation was for the direct quote, not for the approximations at the beginning of the paragraph. I'll have to check it out.

[marbles]

Here's the full article, from The New Republic. I'll give my two cents on a follow-up post:

On the afternoon of President Bush's economic speech this Tuesday, there was no happier Republican in Washington than Grover Norquist, the president of Americans for Tax Reform, conservative-coalition builder, and the White House's favorite anti-tax radical. Like many conservatives, Norquist has long fought to kill the tax on dividends, and he was giddy that Bush made that the centerpiece of his new tax plan. He had just come from a debate on National Public Radio in which he eviscerated a "midget commie from Massachusetts"--former Clinton administration Labor Secretary Robert Reich--and couldn't wait to square off Thursday on Bill Moyers's PBS show, which he "thinks" is called "Why we should steal everyone's money and give it to bums who won't work." He was looking forward to meetings on Friday with Dick Cheney and Karl Rove, presumably to plot a strategy for getting the new plan passed. Norquist insists the dividend tax-cut debate will be devastating for his opposition. "We are going to cripple the entire Democratic leadership all at once," he predicts. "I'm winning on all fronts."

It wasn't obvious, however, that this was the front the Bush administration wants attacked. In fact, in the pantheon of taxes that conservatives like Norquist have fought to eliminate, the tax paid by shareholders on their dividends has never quite caught on like the "death tax" or "marriage penalty." First of all, very few people actually pay it; only one-quarter of all tax-filers currently receive dividends. And, for Republicans defensive about tax cuts skewed toward the ultra-wealthy, a crusade against the dividend tax confirms their opponents' worst suspicions: More than 70 percent of the benefits of eliminating it will go to the wealthiest 5 percent of American taxpayers.

Why then has the Bush administration suddenly taken an issue dear to a handful of anti-tax cranks and made it the cornerstone of its economic policy? Partly it's because the administration thinks it can make the politics work. But mainly it's because conservatives inside and outside the White House fervently believe that the key to economic health (and Bush's reelection) is a booming stock market.



emocrats are already calling the tax cut a payoff to Bush's K Street allies. But that analysis doesn't quite hold up. To begin with, the case against the dividend tax is that it is "double taxation"; corporations pay a tax on their profits, and then investors pay a tax when they receive those profits as dividends. If Bush really wanted to reward the business community, he would have proposed eliminating this tax at the corporate end. But, fearing being tarred as too close to corporations, he rejected this approach. The other problem with the simple K Street explanation is that the business community hasn't been clamoring for a dividend tax cut. What corporations really wanted from Bush were new tax incentives for investment--and they didn't get them.

In fact, Bush's embrace of the dividend tax cut is less about campaign contributions than ideology. In the past, liberals and conservatives both discounted the stock market's role in stimulating the economy. But, during the Clinton boom, this view began to change. Most famously, Alan Greenspan warned that overvalued markets could actually cause inflation. Economists call it the "wealth effect," and now Bush and his aides have become its greatest champions. Simply put, the wealth effect is the extra dollar amount a person spends from an increase in wealth. The theory is that the 1990s stock boom dramatically increased the net wealth of many Americans. The stock market soared, investors' portfolios fattened, and--at least on paper--investors' net wealth shot up, leading them to consume more. Even if they didn't have actual extra income, they felt rich and therefore spent more and saved less. That investor-class consumption drove the '90s economy. By making the dividend tax cut the centerpiece of his economic plan, Bush is embracing the idea that the stock market is the most important economic indicator in the United States--in other words, he's embracing the wealth effect.

The most influential work on the wealth effect has been done by Michael Palumbo, a Federal Reserve Board economist. In a recent study, he and another Board economist, Dean Maki, showed for the first time that in the '90s the households that gained the most from the stock-market boom are the same households responsible for the era's plummeting savings rate. Almost all the drops in savings in the late '90s--from about 7 percent of disposable income to about 1 percent--can be attributed to the richest 20 percent of households. The savings rate of the bottom 80 percent--the people least likely to own stocks--barely changed. Another influential paper, by Maki and fellow Board economist Karen Dynan, looked at data from 1983 to 1999 and clearly showed that stock-owning households spend more after stock prices rise, while non-stock-owning households don't.

The most radical part of Palumbo's work is his rejection of the traditional economic view that to stimulate the economy, cash must be pumped into the hands of lower-income Americans--in the form of a quick rebate check or payroll tax holiday, for example--because they are more likely than the wealthy to spend that extra disposable income. For adherents of the wealth effect, the way to boost consumption is to make relatively wealthy investors feel richer by juicing the stock market. One of the main critiques of the wealth effect was that it was impossible that the small slice of shareholding households was responsible for so much extra spending. But Palumbo says that is exactly what happened. "[A]ll of the consumption boom [of the '90s] really can be attributed to the richest groups of households," his paper argues.

You won't hear the White House making this point publicly, but the Bushies believe that returning cash to rich investors is their insurance policy against a bad economy in 2004. While Greenspan worried about the inflationary impact of the wealth effect, that danger has obviously passed. Now the danger is that battered investors will stop consuming. In a recent speech, Bush's top economist and the architect of the new plan, Glenn Hubbard, noted, "One of the key risks obviously now in the economy's recovery are recent equity price declines in the United States. And you know there's something called a wealth effect, an effect on consumer spending and business spending when wealth is destroyed, much as we have seen in the decline in stock-market prices in the United States."

What worries Hubbard and the White House is that more than $7 trillion in value has been wiped out of the stock market over the last three years. According to the wealth effect, consumption should be plummeting in the wake of the market's decline, and yet consumer spending has continued to hold up the economy. One reason for this is that the enormous decline in the value of stocks has been cushioned by an incredible rise in the value of homes. "Fortunately, the losses in stock wealth to the midpoint of 2002 have been partly offset by gains in real estate wealth in the United States," an analysis from the financial services firm RBC recently noted. But wealth effect advocates also attribute the continued spending to the slow pace at which investors fully adjust to their decreased wealth. In other words, the predicted drop in consumption may well kick in this year.

For the White House, that means stimulating the stock market is more important than ever. Bush's aides argue that the dividend tax cut will bring investors flooding back into the market and raise share prices by 10 percent, which will presumably keep consumption high as shareholders start to feel wealthy again.

This emphasis on the investor class dovetails with the politics of Bush's reelection. He cares about how the economy will look to voters in 2004, not today. If the dividend tax cut has any impact on the markets and consumption, it won't be until next year, when Bush is campaigning. Bush is also trying to appeal to the two-thirds of voters who own stocks. The Democrats failed to capitalize on the bear market in the last election, and Bush wants to put them on the defensive about an issue supposedly dear to investors. "They are all getting locked in as enemies of the investor class," says one Republican strategist. And whereas in the 1970s and 1980s unemployment and inflation were the key indicators of economic performance to the public, the White House has come to believe that the stock market is now the key barometer. "There is a new number, and it is wealth," says Norquist. If the economy cooperates with these politics, the White House will have invested well.

[Chris Alger]

"Citing data from the Internal Revenue Service from 2000, [The Center on Budget and Policy Priorities] said 22 percent of taxpayers with incomes under $100,000 reported any dividend income, while 72 percent of filers between $100,000 and $1 million and nearly all filers above $1 million reported dividend income."

R. Stevenson, NYT, 1/8/3
http://216.239.57.100/custom?q=cache...n&ie=UTF-8

I don't know about pension funds, but dividends from IRA's and 401-k's are tax-exempt anyway, so the dividend cut wouldn't affect on them. Also, the dividend income received by middle income groups tends to be minuscule.

[marbles]

Good article. A few spots:

"First of all, very few people actually pay it; only one-quarter of all tax-filers currently receive dividends."
--Well, there it is in black and white. Unfortunately, the author doesn't elaborate from here, so I can't tell whether or not I'm wrong. I know for a fact that I have paid dividend taxes through mutual funds, but I've never declared dividends on my taxes. No idea whether that puts me in the top 25% or not.

"More than 70 percent of the benefits of eliminating it will go to the wealthiest 5 percent of American taxpayers"
--This sounds accurate in its context. Again, assuming they are taking mutual funds out of the equation, I figure 70% of the dividend taxes declared on individual tax returns are done by the top 5%.

"For the White House, that means stimulating the stock market is more important than ever. Bush's aides argue that the dividend tax cut will bring investors flooding back into the market and raise share prices by 10 percent, which will presumably keep consumption high as shareholders start to feel wealthy again."
--This, of course, benefits anyone who owns stock, and the impact is huge.