Economists Predict Record Deficits Will Result
On January 7, President Bush unveiled his plan for reviving the sagging economy: a $674 billion stimulus package featuring tax breaks favoring the wealthy. Critics of the plan – who include members of the President’s own party – warn that it not only fails to provide economic stimulus, but will send the country’s deficits soaring. In fact, economists predict that plan could lead to a record budget shortfall – one that, according to the Center on Budget and Policy Priorities, could exceed $900 billion.

According to analysts, the Bush plan fails as a stimulative tool primarily because it calls for permanent tax breaks rather than immediate, temporary measures designed to jump-start the economy. Economists argue that while it makes sense to increase deficits when the economy is weak as a way to fuel economic growth, permanent tax cuts will increase deficits well into the future – long after the economy has recovered. This will undermine the government’s ability to pay for education, health care, and housing as well as Social Security and Medicare.

The central component and most expensive part of the Administration’s proposal is the elimination of taxes paid by individuals on stock dividends. Although the Bush team is touting this measure as a benefit to all stock-holders, analysts explain that because the richest 10 percent of families hold more than 90 percent of all shares held directly by individuals outside of retirement accounts, the vast majority of Americans would receive nothing from the proposed dividend tax break.

In addition, because state and federal tax codes are linked, eliminating the individual tax on dividends would reduce state revenues by more than $4 billion a year over ten years. Critics argue that states, currently experiencing serious budget crises, can hardly sustain such losses right now. Many states have implemented, or are set to make, drastic cuts to social service programs benefiting low-income families in order to close budget gaps. The loss of state revenue from the Bush plan could lead to further social service cuts.

The President’s stimulus plan would also accelerate the reductions in the top four income tax rates included in his $1.35 trillion 2001 tax cut and currently scheduled to take effect in 2004 and 2006. Like the dividend tax break, this measure would overwhelmingly benefit wealthy Americans. The plan would also accelerate increases to the child tax credit and married couples tax break.

All told, the 80 percent of American households making under $73,000 per year would get less than 10 percent of the new tax breaks President Bush is proposing. Skewed as they are toward the wealthy, the proposed tax cuts would do little to stimulate the economy since upper-income people tend to save rather than spend additional income.

One day before President Bush announced his proposal, House Democrats unveiled a stimulus plan of their own. Unlike the Bush plan, the $136 billion Democratic package contains temporary measures that would provide an immediate boost to the economy. For example, the plan would provide every American – including low-income families who are likely to spend extra income immediately – with a $300 tax rebate. The rebate would be refundable so those who do not make enough to pay federal income taxes would still receive it. In addition, the Democratic package would offer $32 billion in tax credits to spur business investments this year, provide $31 billion in immediate fiscal relief to the states, and $18 billion to extend unemployment benefits for 26 weeks. In contrast to the Bush plan, almost all the costs of the Democratic proposal would be incurred this year.

Democratic Senator Max Baucus (D-MT), Ranking Member of the Finance Committee, also presented a stimulus package. At the cornerstone of the $160 billion Baucus plan is $75 billion in fiscal relief to the states. The plan would also provide incentives for business investments and tax credits to purchase health insurance.

Although the White House is pressing for quick passage of President Bush’s plan, it is unclear when Congress will take up the measure. Senator Chuck Grassley (R-IA), Chair of the Finance Committee, has indicated his intentions to work toward a compromise bill with Democrats. In fact, Grassley recently participated in a meeting of centrist senators who gathered to discuss more modest alternatives to Bush’s proposal. The Senate will likely consider a stimulus measure as part of a broader reconciliation bill that will reach the floor this spring.

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