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TWO CENTS' WORTH
The Bush plan: A
global-scale disappointment
By Henry
C K Liu
The whole world has been hoping for a
quick recovery of the US economy to lead it out of
protracted economic doldrums and waiting for the US
president to command the awesome power of his office
toward that objective. The US$674 billion "growth and
jobs" proposal unveiled on Tuesday by President George W
Bush indicates that their wait is far from over.
After more than two years of slow domestic
economic growth that began even before he came to
office, Bush unveiled a proposal the centerpiece of
which included eliminating double taxation on corporate
dividends (dividends are now taxed at both the corporate
level and the individual level), in a bold attempt to
manage the economic debate in preparation for the 2004
presidential election campaign. Reinvoking dated 1980s
supply-side theories to solidify his conservative
political base, Bush's tax plan proposed giving stock
owners $364 billion in tax breaks a year and boosting
the size of the tax cuts already passed in 2001 by
nearly $300 billion, but only 15 percent of which would
be accelerated to impact the stalled economy in 2002.
The plan proposed no financial aid to the
financially distressed states and localities. It offered
only minor incentive for capital investment to small
business. Some $64 billion is earmarked to accelerate
cuts in income tax rates, $58 billion to speed up the
removal of the "marriage penalty", $91 billion to hasten
an increase in the child tax credit, $48 billion to
accelerate the move of lower income taxpayers to the 10
percent bracket, $29 billion to prevent more people from
facing the alternative minimum tax, and $16 billion in
incentives for small business purchases.
The
Wall Street Journal drew attention to the one-line
specification from the Treasury to give shareholders a
potential tax break on profits even when a company
retains or reinvests profits rather than pay dividends.
For every dollar of retained earnings, the shareholder
would be allowed to exclude one dollar from taxable gain
at the time the share is resold, either as income or
capital gain. Thus the cost of the
dividend-tax-exemption plan may be much larger than
estimated.
The plan proposes moving up future
tax-rate reductions adopted by the 2001 tax cut to be
effective this year and retroactive to January 1,
instead of their original phase-in dates of 2006 and
2008. The government would adjust income-tax withholding
immediately after passage to augment taxpayer cash flow.
Bush would also reduce the taxes paid by married
two-income taxpayers this year instead of 2009 to
relieve the marriage penalty and raise the child tax
credit to $1,000 from $600 this year instead of 2010;
refund checks for excess payroll withholdings would be
issued this year. It would also move millions of US
taxpayers into the lowest tax bracket of 10 percent this
year instead of in 2008. Of the $674 billion package,
all but $3.6 billion comes in the form of tax breaks;
these other funds are for $3,000 accounts that
unemployed workers can use to find new jobs. In
addition, small businesses would be allowed to increase
the amount of equipment purchases they can write off for
tax purposes to $75,000 from $25,000.
Charges
are already flying from Democrats that the Bush proposal
was an unnecessary handout to the rich that would
further increase federal deficits already under pressure
from military spending while neglecting low-income
people and providing insufficient short-term stimulus to
boost the stagnant economy. House Democrats have
proposed an alternative plan that would spend more than
Bush would in the current year and spread it more evenly
across income levels but would cost one-fifth as much
over 10 years because its measures are temporary.
Republicans answered with counter charges that the
Democrats are promoting class warfare.
Congress,
despite Republican control of both houses, is expected
to push for a more egalitarian plan and companies,
particularly those in the New Economy that do not
declare dividends, will push for alternative tax breaks
for big business.
Couched profusely in populist
rhetoric that masked it conservative content, Bush
described the $1.35 trillion 2001 tax cut as merely the
beginning of his commitment to lower taxes. He recycled
supply-side economics arguments that tax cuts would
actually increase government receipts, based on Says'
Law that supply creates its own demand, which only holds
true under conditions of full employment, which
conservatives conveniently ignore. Without full
employment, tax cuts in favor of supply side-investment
merely adds to overcapacity, a current curse that has
stalled the global economy. A preliminary Brookings
Institution analysis of the Bush plan shows that those
earning more than $1 million annually would see their
after-tax income increase by $88,873 on average, or 3.9
percent. Those earning below $40,000 would have average
after-tax income increases of $400. John Snow, Treasury
secretary nominee, stands to gain a tax windfall of more
than $600,000 a year on dividends from his 2 percent
stake in the transportation company he headed before
coming to Washington, not even counting dividends from
his holdings in other companies.
Bush aides
described the president as wanting "to think big",
opting to continue to press not just for the new and
accelerated tax cuts as counter-cyclical measures, but
for making the 2001 tax cuts permanent. The Bush plan
accelerates everything in the 2001 plan except the
estate tax and the two provisions aimed explicitly at
the working poor: one would have increased the size of
the child tax credit that poor families who pay no taxes
could receive as a tax a refund and the other increased
the earned income tax credit for poor married taxpayers.
Under the Bush plan, only $102 billion of tax
breaks would reach taxpayers' pockets in the first 16
months of the plan. Of that, $20 billion is from the
dividend tax cut, which investors generally would not
reap until they file their tax returns in 2004.
Struggling state and local governments are
disappointed that the expected $10 billion federal aid
to help with budget deficits was missing from the Bush
plan. The states would also lose up to $5 billion
annually in dividend receipts now automatically
calculated from federal returns. For many taxpayers,
much of what the federal government gives back, the
states and localities will take away.
The US
unemployment rate in November was 6 percent, with 8.5
million idle workers. Bush's plan claims it will create
2.1 million jobs over three years, still leaving 6.4
million jobless three years from now.
It was
unclear what effect the scrapping of dividend taxation
would have on overseas institutional and individual
holders of US stocks whose tax bills are governed by
countries' tax treaties with the United States.
While Bush aims to think big, his tax plan shows
that he is wearing his ideological thinking cap. The US
tax system is irrational and unfair. It acts as a
structural obstacle to economic growth. Everyone agrees
on the need for tax reform; the dispute is only on how
the tax system should be reformed.
Yet the US
economy is stalled because of overcapacity fueled by
debt, a condition also found almost everywhere else
around the world. And in the United States, the complex
tax regime affects the rules of economic behavior in
unique and peculiar ways that encourages debt. On this
issue, the Bush plan said little.
Bush's critics
are also missing the central issue of fair credit
allocation, and instead frame the debate on whether the
rich should get more or less tax relief than the poor.
The real issue is that the government needs to deliver
purchasing power to those who will promptly spend the
money consuming the surplus products the world needs to
produce to get out of a structural economic crisis.
Giving money to those who will only invest it for more
productive capacity will only exacerbate the current
overcapacity problem. Yet the ideologies of neo-liberal
market fundamentalism and sound money prevent any
consideration for government intervention on demand
management. Market forces as currently constituted by
the existing tax and trade regimes tend to depress
aggregate demand by treating unemployment and low wages
as desirable prescriptions for inflation that threaten
profit, even in the face of global deflation and
overcapacity. Thus the economies of the world, both
advanced and developing, are locked in a downward
spiral, causing the global economy as a whole to shrink.
The US dollar is facing a much-delayed
exchange-rate correction, but it is misleading to
conclude that this is the beginning of a collapse of the
dollar. A correction of the dollar up to 20 percent in
relations to select foreign currencies would have
positive temporary effects on current account balances
in trade, but it will not solve the structural problems
in world trade. Tokyo and Washington are jointly pushing
for a Plaza Accord type move against China to push up
the yuan, on the theory that China is exporting
deflation, a view China rejects. The low prices of
Chinese exports is the direct result of low Chinese
wages and land rents. There is logic in the argument
that China needs to continue its policy of rising wages
to deal with domestic deflation. But the Chinese trade
surplus from its export to the United States has a
quadrupling effect on added US gross domestic product
(GDP). In other words, for every dollar of US trade
deficit in favor of China, the US economy registers $4
of additional GDP in value-adding services, such as
marketing, distribution and retail markup, trade and
consumer financing, etc. It is arguable that global
deflation is not caused by any one currency being
periodically and temporarily overvalued, or that
competitive devaluation or upward valuation could solve
the global deflation problem.
But for dollar
hegemony, a term describing the undeserved role of the
dollar as a preferred reserve currency for international
trade and finance, the US trade deficit is not much
different that that of most of the Third World. The
Washington Consensus, which the United States preaches
and which the International Monetary Fund (IMF)
implements, prescribes combinations of monetary and
fiscal policies to deal with trade deficit that include
high interest rates to reflect the real cost of
borrowing, and tax hikes and other austerity programs to
dampen demand. But the US is exempt from such
"stabilization" programs because of dollar hegemony.
Trade is shrinking because the process of
transferring wealth from the poor to the rich through
trade has run dry both domestically and internationally
after a decade. Trade will have to reverse course and
begin creating wealth rather than merely transferring
it. The easiest place to start creating wealth is where
poverty rules. In a poor land, even unsophisticated,
simple ideas can create wealth because there is no
downside on real poverty. The reason wealth is not
created today in the world's poor regions is because of
the exploitative structure of the current trade regime.
Neo-liberal market fundamentalism never understood that
poverty hurts everyone, not just the poor.
The
reason world trade has been shrinking in the past few
years may be that trade as currently structured
transfers wealth from the less developed economies to
the advanced economies, and from the poor to the rich
within national borders, a double-barreled dwindling
game. What is needed is to shift trade from being a game
in which every nation competes in predatory exporting to
earn dollars by lowering wages, to trade being a game to
create wealth in all national economies through economic
and human development. This means that trade should be
structured to support economic development to raise
wages everywhere, not to depress wages to compete for
larger export share. This means trade incentives should
be focused more on education, health, and social
development, rather than exclusively focusing on
low-cost manufacturing. The advanced economies should
export their wealth-creating technologies to the less
developed economies to enable them to create wealth
locally through domestic development, not to export
low-price goods and commodities to enrich the advanced
economies. The advanced economies will have to be
prepared to transfer technology and knowledge, forgoing
exorbitantly priced intellectual property rights, accept
smaller profit margins, leaving more generated wealth in
the less developed economies, but because the world
economy will then grow faster, even a smaller profit
margin will yield higher profit for the advanced
economies.
If the United States takes the lead
in the progressive restructuring of trade, it will
defuse the growing anti-US feelings among the world's
exploited poor, defuse tendencies for destructive
terrorism and reduce the need for anti-terrorism
expenditures. The question is not so much the
appropriate exchange value of the dollar or the yen or
the yuan, which is merely a temporary technical
misalignment issue. A multi-currency world trade regime
will allow economies to focus more on domestic
development. The exchange value of the dollar is not as
important an issue as the dollar's dominant position as
a reserve currency for world trade and finance, which
tilts trade as a vehicle to forcibly transfer global
wealth to the issuer of the dollar, namely the United
States. Nor is it a question of the technical aspects of
domestic tax polices. The issue is the need for full
employment and rising policies world wide that would
eliminate global production overcapacity. If government
can live with zero interest rates, why is it so
difficult to live with zero unemployment?
The
world is at a very dangerous moment in its history,
caused by violent political fallouts from the
destructive economic impacts of neo-liberal trade
globalization. The United States needs to shift
direction and help the world create wealth that is
shared more equitably, both within US borders and
internationally. In the end, the US will benefit more as
the leading economy of a more prosperous and peaceful
world. That would be thinking big.
Henry C
K Liu is chairman of the New York-based Liu
Investment Group.
(©2003 Asia Times Online
Co, Ltd. All rights reserved. Please contactcontent@atimes.com for
information on our sales and syndication policies.)
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