Here are three reasons for doubting President Bush’s tax cutting “jobs and growth” plan, now wending its way through Congress:
* Even the most favorable assessments conclude that the plan wouldn’t produce many new jobs.
A little-noticed analysis of the House version, which employs the so-called dynamic scoring techniques favored by the White House, shows that, at best, the proposal would boost employment by 900,000 jobs over the next five years. That’s only one-third of the private-sector positions lost since the March 2001 start of the recent recession.
Equally as troubling, the analysis by Congress’ Joint Committee on Taxation suggests that the plan would actually cost the economy jobs -- perhaps several hundred thousand of them -- in the five years that followed as temporary elements of the proposal switched off.
* It wouldn’t produce much more growth.
The same analysis suggests that the House version would add $19 billion to $76 billion annually to the real gross domestic product in the next five years, before subtracting a modest amount in the five that followed.
As the measure’s chief architect, House Ways and Means Committee Chairman Bill Thomas (R-Bakersfield), put it -- in a comparison that was intended to drive home the measure’s powerful punch, but seems to do the opposite -- this is equivalent to boosting the U.S. economy by somewhere between the total annual output of Vermont and that of Nevada.
* It’s peanuts compared with what the government is already doing to revive the economy.
By some measures, Washington is pumping more fiscal stimulus into the economy than at any time in American history.
Typically, the government injects enough through tax cuts, spending hikes and “automatic stabilizers” like increased jobless benefits to make up for 30% to 40% of the loss in GDP from a slowdown, according to C. Eugene Steuerle, a former Reagan administration tax expert now with the Washington-based Urban Institute.
But this time around, it’s already covering the entire loss and then some, Steuerle said. That means the amount the government is devoting to ending the downturn is greater than the downturn itself. New tax cuts would only add another dime or two for every dollar that Washington already has committed.
“Given all the money floating around right now, it’s difficult to argue the economy really needs more stimulus,” Steuerle said.
The story of the “jobs and growth” plan is a case study in how a proposal can break away from its original rationale and still maintain a momentum of its own.
The economics profession entered the fray in December pretty much convinced that government fiscal policy -- tax cuts and/or spending hikes to boost growth -- does not work.
Economists acknowledged that Bush’s 2001 tax cuts were well-timed, and probably kept the economy from sinking further than it did. But they wrote off the timing to luck and concluded there was little reason to try to repeat the performance.
The White House started out convinced that Bush must once again show his concern for the economy and especially for the 401(k) class -- middle-class investors who had seen their retirement savings wither in the long bear stock market.
Bush did so first by dumping his Treasury secretary, Paul H. O’Neill, and his longtime economic advisor, Lawrence B. Lindsey. He followed that by embracing an economic plan twice the size that had been expected and, surprisingly, centered on the elimination of the personal tax on stock dividends.
At the outset, the dividend tax cut appeared to have an advantage similar to that of a political appointee without a paper trail -- almost no one had discussed the idea in a decade, so there was little organized opposition. It thrilled conservatives, who saw it as a way station en route to wiping out taxes on all investment income. And it was warmly greeted by economists, who thought it would iron out a troubling wrinkle in the tax system -- the double taxation of dividends.
The cut did have two drawbacks. Almost everyone agreed it wouldn’t be much of a short-run stimulus. And almost nobody on Capitol Hill was interested in the proposal.
At least initially, Bush and his advisors appeared to have matters well in hand. Then the ground began to shift under the plan this spring as the war in Iraq came and went, stocks and confidence perked up, but employers kept right on cutting jobs -- more than 500,000 of them in the last three months alone.
Suddenly, a little job-boosting stimulus began to look pretty good to lawmakers, economists and the White House. The president and his aides stopped talking about the long-run benefits of the plan and started hammering away at how tax cuts leave people with more money to spend now.
“You see, when somebody has more of their own money, they’re likely to make a decision on a good or a service,” Bush told an Indianapolis audience Tuesday.
“They say, ‘I want more of this,’ and when somebody meets that demand by additional production, somebody is more likely to find a job.”
But there’s a problem. With so much of the Bush plan devoted to the dividend tax cut and similar breaks that either don’t put much money in people’s pockets or don’t do so directly, there’s little evidence the happy chain of events the president described will occur.
When lawmakers such as Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) tried to cope with the problem in recent weeks by suggesting that the White House drop the dividend cut, they were told that Bush must have a win on this subject, so some version of the measure must remain.
The result -- at a potential cost of more than a half trillion dollars in additional deficits and depleted government services -- will almost certainly be a tax cut that neither fixes the dividend problem nor assures more jobs and growth.
In all, a plan and a political performance about which there are good reasons to have doubts.