The Right Economic Stimulus

As President Bush prepares an economic package for his January State of the Union message, we have this piece of advice: be pragmatic and be bold. Save talk of making the $1.3 trillion tax cut permanent for the campaign in 2004--because, frankly, the proposal is all about politics anyway. It will have virtually no effect on spending next year. Besides, we all know that nothing is permanent in Washington, especially the tax code. Focus instead on the three realities that will shape economic growth in 2003: uncertainties about a war on Iraq, business' decision to continue cutting payrolls and curtail investment well into the year, and states' and cities' raising taxes sharply. These three factors threaten to push the economy down, perhaps into a double dip.

Mr. President, here's what you should do. Despite public antagonism toward Corporate America, its sins of the past should not stop you from trying to boost business investment. The boldest move would be to reduce double taxation on dividends and give the break to companies, not individual shareholders. While corporate corruption makes this politically difficult, it is the economically pragmatic course. A significant cut would lift the aftertax rate of return, boost price-earnings ratios, help the stock of dividend-paying companies, and seriously promote investment. Rising stocks should also restore wealth to the investor class and promote consumption.

Another bold move you should consider is cutting the payroll tax for the first half of next year. Since companies and individuals equally pay for Social Security, both would benefit. In one policy move, you promote consumption and investment. This is a controversial gambit, but these are unusual times.

If a payroll tax holiday is too hot to handle, then consider moving up the income tax cuts scheduled for 2004 and 2006 to 2003. Mr. President, remember that state tax receipts fell 10.4% in the second quarter of this year. Real estate, sales, and income taxes are rising all over the country. Just to offset this fiscal drag, Washington has to cut taxes.

The American economy has rarely faced war, deflation, and a burst tech bubble at the same time. The worst mistake, Mr. President, would be to act cautiously. To help pay for a strong stimulus package that has a broad impact, you should reconsider two very expensive plans that rain riches down on a very narrow part of society. Capping the inheritance tax exemption at $5 million would cover 99% of all American families and save billions. Cutting back on the monstrous farm subsidy would do the same. Mr. President, being economically bold requires you to be politically courageous. With this past election, you can afford to be.

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