KWAME HOLMAN: Three times this week, President Bush told audiences that only one thing will create new jobs in this country, enactment of large tax cuts. In Albuquerque, New Mexico on Monday:
PRESIDENT GEORGE W. BUSH: The best way to stimulate this economy is to have robust tax relief for the American people.
KWAME HOLMAN: Later that day, in Omaha, Nebraska:
PRESIDENT GEORGE W. BUSH: We don't need to be little-bitty in this deal. We need to be robust to get people back to work.
KWAME HOLMAN: And yesterday in Indianapolis:
PRESIDENT GEORGE W. BUSH: For the sake of economic vitality Congress has got to act and act boldly on this plan to get more of your own money.
KWAME HOLMAN: The president's remarks came as the Senate began debate this week on a $350 billion tax cut, much smaller than the president prefers. Today, Majority Leader Bill Frist reminded members of both parties to consider carefully their votes on the tax legislation.
SEN. BILL FRIST: In our very closely divided Senate, one vote makes a difference. So I would say to each of my colleagues, please remember that the people back you and how you participate in this debate in growing that economy is important to our constituents.
KWAME HOLMAN: Democrats such as Illinois' Dick Durbin say the Senate Republican tax cut plan, like the president's original proposal, heavily favors one class of Americans.
SEN. DICK DURBIN: The winners in the Bush tax bill are the elite in America. It isn't the working families and small businesses who will come out ahead, they're going to be saddled with this deficit, created by a tax cut when the country's in recession.
KWAME HOLMAN: The tax bill being debated in the Senate would: Lower individual tax rates across the board, create incentives for business investment, and reduce the tax on stock dividends. That dividend element is what most Republicans are concerned about. They want to eliminate the tax on stock dividends altogether, as the president originally proposed. Iowa Republican Chuck Grassley:
SEN. CHARLES GRASSLEY: The president called for a complete end to this double taxation of dividends. He'd even go further, as I would and say that double taxation of anything is wrong, dividends or otherwise.
KWAME HOLMAN: As chairman of the tax-writing Finance Committee, Grassley's job of passing the president's plan was made more difficult earlier this year, when a few Republicans joined Democrats to cut the size of the president's tax cut in half. That meant only reducing the tax on dividends.
But the White House reportedly still is pushing for a full -- though temporary -- elimination of the dividend tax. Taxes would phase out over the next four years, - 50 percent in 2004 -75 percent in 2005 -and 100 percent by 2007 but dividend taxes would reappear in 2008. Today, Senate Democratic Leader Tom Daschle called that plan a gimmick, warning that once taxes on dividends are fully phased out, they'll never return.
SEN.TOM DASCHLE: It's a very imaginative gimmick but everybody sees through it; it’s their way of ensuring they get the full dividend tax cut because people expect of course, that that sunset, once it's fully phased in, will never occur.
KWAME HOLMAN: Daschle and other Democrats favor a much smaller tax cut package of $150 billion, focusing on lower-income Americans and aiding cash-strapped states. Republicans, like Utah's Robert Bennett, agree with the president that the best way to stimulate the economy is to focus tax cuts on those who create jobs.
SEN. ROBERT BENNETT: It's not a matter of the federal government going out and spending a billion dollars to purchase 47,000 jobs, it's a matter of the federal government creating an atmosphere in which those who are willing to risk their accumulated capital, or in the case of borrowing, somebody else's, and produce the jobs that come out of that activity.
KWAME HOLMAN: Any tax legislation that passes the Senate will have to be worked out with the House, which approved its own version of the president's tax cut bill last week.
JIM LEHRER: Ray Suarez has our own tax cut debate.
RAY SUAREZ: And for that, I'm joined by: Paul Krugman, columnist for The New York Times and professor of economics and international affairs at Princeton University, and Allan Meltzer, professor of political economy at Carnegie Mellon University. He served on President Reagan's Council of Economic Advisors. Professor Meltzer, the president said a tax cut would put our fellow citizens to work, in his words. Would a tax cut help create jobs, and if so, how?
ALLAN MELTZER: Well, there are several ways in which a tax cut is going to help create jobs. You know, it's interesting that we have this debate, because President Kennedy had a big, the cut with a large corporate tax cut, he cut marginal tax rates, it was very successful. President Reagan cut tax rates. That was very successful.
And now we're having a debate again, except the people who are on one side in the Kennedy debate are now on the other side, the Democrats of course were favorite when it was President Kennedy, they oppose it now. And the Republicans talked about big deficits back in the 60s, and they of course are in favor of the tax cut now. So we know that there's a lot of political rhetoric that we want to put to one side and look at what the issue is about.
What this issue is about is two things: One is there's a temporary stimulus to the economy of about $25 billion this year, and perhaps $25 billion next year, and the $550 billion number is a throw away number to make the thing look big. But we're going to have two presidential elections and five congressional elections before we have to worry about whether we're going to continue these for ten years. And the second thing so, the first effect is going to be to give us $25 billion, approximately, of stimulus this year.
But the big effect comes from a dividend tax cut because that's going to have supply side effects, it's going to try to increase the capital stock to make shareholders, make corporate officers more accountable to their shareholders, to reduce risk by reducing the amount of debt in the corporation and substituting equity.
And the president deserves high marks for having come up with a structural change that I think almost every tax expert at one time or another has endorsed, that is eliminate the double taxation of dividends in order to get a more efficient tax system and one that will stimulate investment and stimulating investment means we create more jobs, but not only more jobs, but better jobs, because people have more capital to work with so they're more productive.
RAY SUAREZ: Professor Krugman, same question. Would a large tax cut help create jobs, and how?
PAUL KRUGMAN: You know, it's funny, Professor Meltzer made almost exactly the point I'd like to, which is that the purpose for which this tax cut is being sold it actually barely addresses. If we take his numbers, we're talking about $25 billion this year, $25 billion next year in actual stimulus to the economy right now. That's nothing. That's a very small amount. That's actually going to be swamped by the budget cuts that state and local governments are making in the face of their budget crisis. This is not a bill that's going to do anything significant for the economy now when we're in trouble.
In fact, the $550 billion is basically dishonest. It's full of gimmicks. If you took out the gimmicks, if you did an honest accounting, this is really more than a trillion dollar tax cut bill. There's an academic case we could make about whether it might be a good idea to change the way we tax dividends. But all of the things that people say in favor of it say if you can find a way to do this without worsening the budget deficit, it's a good thing to do.
But in fact the administration has no plans to do anything that will reduce the budget deficit. They're going to take an economy which, a government situation which is already alarming, and they're going to push us quite a ways toward serious banana republic financial fiscal irresponsibility. And all of this in the name of job creation, which the bill is just not going to do, it's been a remarkable thing that it's been very hard for this administration to find anybody who isn't directly working for it who will actually say that this bill is good for jobs or growth.
A whole series of studies by people who are either bipartisan or sort of on their side say, gosh, yeah, if there was some other, if you had some other tax increases to pay for this or if you had any plausible expenditure cuts that would make room for it that would be fine. But as it now stands it's basically going to balloon the deficit and it's a bad thing for the economy.
RAY SUAREZ: Professor Meltzer particularly endorsed the use of cuts on taxes on dividend payments, Professor Krugman. Is it relevant what kind of taxes are cut... is there a greater stimulative effect if you cut the tax on dividends as opposed to making it all an income tax cut?
PAUL KRUGMAN: Actually, the dividend tax cut is almost designed to have as little stimulative effect as possible because, important thing about dividends --lots of Americans get dividends, but most of them get dividend payments into their 401-k's, that is they're already tax sheltered. The only people who gain from this are people who have so much in the way of stocks, so much in the way of dividends that they'll own a lot that isn't in an already tax sheltered retirement account, which means very, very well off people. Something like, a very large fraction of a dividend tax cut actually goes, literally, to people who make more than a million dollars a year, who are the people least likely to spend it now.
Now, if you ask, okay, are there some incentive effects in the long term, double taxation of dividends is really about one and a quarter taxation if you take into account all the loopholes in the tax law. Is there a case of doing that, yeah -- if you made me a list of about 50 things that might be an issue you'd like to address, this would be around number 43. There are whole lot worse distortions in our tax system than this one. And above all, it doesn't do anything about jobs now.
RAY SUAREZ: Professor Meltzer, respond in general terms to Professor Krugman's remarks, but also to his particular point about growing deficits and the lack of stimulative effect for specific cuts.
ALLAN MELTZER: Absolutely, I've been waiting to do it. Let me take up three different issues, three or four different issues. One is will it have an immediate effect, will it have some effect on the economy. Absolutely. Will it be huge? No. It's a small tax cut, so it's going to have a small effect. How big is a small effect? It's about a half a percent in the GDP growth rate -- not nothing, not bad. And that will add jobs in, for the economy. The second one, that you asked about is the deficit. I mean, let's sort of put that into some perspective.
The deficit now is, or the debt, the U.S. public debt owed by the public is about 35 percent of our current GDP. So what would it be if it were terrible? Well, in 1945-46 it was around 100 percent of GDP, the economy didn't go into the tank or collapse or do anything else. So there's a lot of room in there for, for the deficit to get bigger without having any of the adverse effects.
Now, you might ask, why is that, because we're going to have these big deficits. The answer is because we're in a global capital market where the amount of securities out there is something on the order of 60, 70, 80 trillion dollars that we're talking about. And we're going to put in, a few hundred billion. It's really a small amount. So you have to think that it's going to have a big effect on interest rates and other things in order to believe the kinds of things that Professor Krugman is saying, and there just is no evidence, none what so ever, that those effects are very large.
RAY SUAREZ: Let me give Professor Krugman a chance to respond.
ALLAN MELTZER: Wait a minute, let me..let me..may I finish..
PAUL KRUGMAN: Yeah let me just break in here...
RAY SUAREZ: We're running out of time.
PAUL KRUGMAN: The important thing is, and I'm surprised that Professor Meltzer doesn't acknowledge this. The paper debt is the least of our problems. The big problem for the U.S., If we're looking about the long term is the implicit debt, Social Security and Medicare. And that's huge...
ALLAN MELTZER: The administration doesn't affect that at all.
PAUL KRUGMAN: But to run big deficits...
ALLAN MELTZER: It doesn't change that...
PAUL KRUGMAN: It cripples our ability to deal with that.
ALLAN MELTZER: Well that's entirely...
PAUL KRUGMAN: The difference between running a responsible budget now, which gives us some ability to be prepared for the deluge when the baby boomers start retiring and running what are in fact rather large deficits by historical standards over this crucial decade between now and the time when the baby boomers become a huge burden, you know, we're almost at our last chance to do something sensible in preparing for the baby boomers. And instead we're proposing to run, to have irresponsible tax cuts, run bigger deficits.
We are not, the point is we are not in good shape. The fact is that we are in a very, very serious budget prospect. And to say relax the debt to GDP ratio is not historically high.
RAY SUAREZ: Let me get a quick response from Professor Meltzer.
ALLAN MELTZER: First, I don't see anybody on the political scene and I haven't seen anybody on the political scene in a serious position for 20 years that has suggested that we do something about the social security other than talk about it. I agree that we all agree there's a long term problem. But it's not a crisis, it's the kind of problem where by extending the working age by a couple of years we would be able to solve a great big part of that problem.
But in any case, nobody is talking about using this money for that. What the Democrats are talking about is spending it for other things. Increasing health care, they're not talking about reducing the deficit. They're talking about other ways that they would like to create deficits. So I think we ought to be honest about that and not politicize the issue. There just isn't much to that argument.
PAUL KRUGMAN: It's just not true. But ok.
RAY SUAREZ: Okay, Professor Krugman, Professor Meltzer, thank you both.