Seeing Tax Cuts as Stimulating

What's wrong with this picture? A popular president coming out of a successful war has been traveling around the country trying to sell tax cuts to a skeptical public.

One problem is who would get the tax breaks. Four tax-cut plans are now on the table: President Bush's original plan costing $726 billion over 10 years; a $550 billion plan that passed the House last week; a $350 billion plan making its way through the Senate; and the Senate Democrats' $152 billion plan.

The larger plans would give more tax breaks to the rich, mostly by eliminating or reducing taxes on stock dividends. The biggest plans also include tax cuts for ordinary Americans, such as a higher tax credit for filers with dependent children and elimination of the so-called marriage penalty. That's why those plans are so expensive. The Democrats' plan is cheaper because it targets tax breaks to low- and middle-income taxpayers.

Republicans argue that since rich people pay most of the taxes, it's fair that they receive bigger tax cuts. Democrats denounce the GOP plans as giveaways to the wealthy. And the White House is responding: In speeches around the country this month, Bush has been claiming that a family of four making $40,000 a year would see its federal income taxes drop from $1,178 to $45 a year under his plan.

But do most Americans think that Bush's plan would reduce their taxes? Seventy percent say no, according to a Gallup Poll in early May.

Another problem is affordability. Now that the federal government has gone back into the red—big-time—cost is an issue. Polling this month by the Pew Research Center for the People and the Press shows that the worse shape people think the economy is in, the less likely they are to support a tax cut. Those who think the economy will get better over the next year support Bush's tax cuts, 60 percent to 20 percent. Those who think the economy will get worse oppose a tax cut, 67 percent to 14 percent. Their concern: We can't afford it. Most Americans polled by Gallup agree that a tax cut will increase the deficit.

Democrats claim that their tax cut is more fiscally responsible, but they're playing on the Republicans' field. As Bush said, "The good news is that the debate has shifted from no tax relief to how much tax relief."

What does the president have to say about red ink? "I'm concerned about the deficit," he told the U.S. Chamber of Commerce on May 6. "But I'm not as concerned about the deficit as I am about people trying to find work."

Bush appears to be making headway by selling his tax cuts as a program to rescue the economy. "Our motto is this," he said. "If tax relief is good for Americans years from now, it is even better when the American economy needs it today."

The president has sustained his personal popularity quite nicely since the end of the war in Iraq, most notably when he played "Top Gun" aboard the USS Abraham Lincoln on May 1. Bush's job-approval ratings have held steady at around 70 percent since the beginning of the war. It's as if the president has reached his upper limit and is staying there.

In late April, the public was inclined to think that Bush's tax cuts were a bad idea (47 percent to 42 percent). Two weeks later, support for them jumped 10 points. Most Americans now think that the tax cuts are a good idea (52 percent to 41 percent). The key factor behind growing public support for the tax cuts: the growing number of people who think that tax cuts would help the economy—36 percent in late April, 47 percent in early May.

Actually, the number who think that tax cuts will hurt the economy has also grown, but not by as much—from 26 percent to 31 percent. Republicans are now solidly behind the tax cuts. Democrats oppose them by 2-to-1. And independents are split right down the middle. On the tax issue, the "Top Gun" generates a powerful partisan recoil.

Will tax cuts stimulate the economy? That's the $64,000 question, or the $64 billion question. Republicans say that cutting dividend taxes would create a stock market boom and that, with so many Americans now invested in the market, people would feel wealthier and thus spend more.

In the end, the tax-cut debate all comes down to a four-letter word: jobs. Politicians are offering the tax cuts as short-term economic stimulus plans. That, however, was not the original purpose of the administration's tax cuts. Yet both the White House and the Democrats are claiming that their plans would produce at least 1 million new jobs by the end of 2004.

Would they? No one knows. It depends on several things, such as whether giving rich people money to invest or poor people money to spend would have a bigger economic punch, and whether people would actually spend the money or just use it to pay off debts.

Right now, we're in a "jobless recovery"—the economy is growing, but so is unemployment. The reason is that productivity is increasing. If new technologies enable each worker to produce more, the economy can grow without increasing the number of jobs.

Business cares about productivity. Voters care about jobs. And more and more voters see tax cuts as a jobs program.