President Bush’s tax cut should be just what the economy needs to get moving again. As passed by Congress, the plan to cut $350 billion over 10 years is less than half what the president originally called for. But it’s still a significant reduction in the burdens borne by citizens and businesses.
The tax package’s major flaw is that most of the major parts of it sunset in the coming years, meaning Congress will have to pass new laws either extending the cuts or making them permanent. Another flaw is that it includes $20 billion in spending — money sent to spendthrift state governments.
The major provisions:
• All income tax rates are cut, the top one to 35 percent from 38.6 percent.
• The capital gains tax is cut to 15 percent from 20 percent.
• The dividend tax is cut to 15 percent from 38.6 percent.
• The child tax credit increases to $1,000 from $600 for most families.
• The “marriage tax penalty” paid by some couples is ended.
• Business equipment expense write-offs will rise to $100,000 from $25,000.
That last item especially will help small businesses, said Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University. He said most of the tax cuts are retroactive to Jan. 1, meaning they take effect immediately.
The short-term benefits, he said, should raise gross domestic product about 0.5 percent for the second half of this year. Long-term benefits include increased capital formation.
“It’s great,” said Arthur Laffer of the tax cut; he’s chairman of Laffer Associates in San Diego and a major architect of President Reagan’s 1981 tax cuts. “It’s as good or better than any tax cut Reagan proposed.” He expects significant increases in after-tax returns on investment.
He also said he expects the president will come back in a year and ask to make the tax cuts deeper and permanent.
Opponents of the tax cut have said it would increase the federal deficit, already projected to be $385 billion for fiscal year 2003-04, which begins Oct. 1. But the real problem is the 16 percent increase in government spending last year. And if the economy keeps stagnating, bankrupt businesses and citizens won’t be paying taxes.
Deficits should be dealt with through spending cuts. Economic slumps should be cured through tax cuts that streamline production and business growth.
We always want deeper tax cuts, but this will do for now.