Tax Bungle Essay

George W. Bush, former President of the United States, during his time in office achieved very little. In fact, not only did he fail to achieve but he actually negatively impacted many aspects of society including the economy. Bush was inaugurated into office alongside a large surplus bequeathed from Bill Clinton. Furthermore, at the time of his entry into the White House, the United States was faced with three central challenges.

The economy was slowly declining into a recession, inequality was on the rise and American institutions such as Medicare and Social Security were in need of funding and innovation. Bush’s first action in office was to implement a tax cut that supposedly would stimulate the economy back into economic growth. However, the Bush tax cut, according to Joseph E. Stiglitz in his article “Bush’s Tax Plan – The Dangers”, was an utter disaster, in all respects.

The proposed Bush tax cut had several key components. Firstly it was composed of an overall income tax cut. However, it was not just a simple tax cut, the income tax rate was reduced more for those in the highest tax bracket and less for those in the smallest tax bracket, as such it wasn’t equal for all members of society; it severely favored the rich over the poor. Furthermore, the plan included large dividend tax cuts. A dividend tax is an income tax on dividend payments to the stockholders of a company. In addition to the above tax cuts, large estate tax cuts were proposed. The estate tax is unique to the United States, it is a tax imposed on the transfer of the ‘taxable estate’ of a deceased person. This tax proposal was overall of tremendous benefit to the rich; this will explained further later on.

Stiglitz points out very clearly that this proposed tax cut plan was not designed to stimulate the economy. However, it in fact would lead to the creation of further inequalities in society. It does so by creating a tax cut which severely favors the rich and not the poor. For example, 50% of all tax filers would receive $100 or less and two thirds $500 or less, yet rich individuals such as Bush would save $44,500 on the 2001 tax returns. Some of this is due to the fact that the rich own most of the country’s dividend-paying stocks and therefore receive the majority of the benefits from the dividend tax cut. The average American owns stocks in pensions funds and Individual Retirement Accounts which are already tax-exempt. Furthermore, the estate tax cut also predominately benefits the rich as they are the individuals with the largest estates, and are subject to the most tax in the first place. Lastly, the rich get the largest cut from their income tax. Therefore, the tax cut will produce inequality.

Supporters of the Bush tax cut would argue that the inequality being created is not a large factor because of the trickle down theory: give money to the rich and eventually it will find a way to benefit the poorer citizens. However, despite sounding nice in theory, it holds very little practical application. Secondly, it would only work if the rich invested a large portion of their wealth and perhaps stimulated economic growth. Studies have shown that at least in the case of the Bush tax cuts the trickle down theory failed. The tax program only created 190,000 jobs, a little over half of the number of new jobless claims needed to be filled. Furthermore, this will only worsen as the deficit and interest rate begin to rise.

Not only did the tax cuts create more inequality and fail to fulfill the trickle down theory but they also failed to stimulate the economy. The dividend tax cut in particular, failed to stimulate investment. Which was foreseen because investment still did not increase with lower and lower interest rates. As such, it was not a smart piece of fiscal policy. Generally, a tax cut would spur a jump in stock prices due to expectations. However, the Bush tax cut was only successful in creating a small, one day effect on stock prices. Extremely rich individuals are the only ones a dividend tax cut affects. And furthermore, although they are affected, when their demand for stock increases and they drive the price of those stocks up, others will simply invest elsewhere.

The unsuccessful tax cuts will ultimately lead to a hike in the United States deficit because they are losing tax revenue. Furthermore, there is a strong correlation between deficits and interest rates; when interest rates rise, the deficit rises. An increase in the interest rate will deter investment and counteract the purpose or goal of tax cuts in the first place.

Stiglitz, argues strongly, that even if the Bush tax cuts were to raise share prices and stimulate investment by dividend paying firms, that it still will not stimulate the economy in the short run and moreover, repress growth in the future. Firms finance investment via borrowing and not the creation of new shares, so investment will be more expensive. Also, new firms pay out little in dividends, while old firms such as the railroads and aluminum companies, pay out a lot. Therefore, the tax cut will favor old firms, instead of the necessary new high-technology enterprises. The new enterprises are at the center of America’s recent success.

Moreover, the tax cuts that the federal government imposes will have more expansive effects on states and localities. States base their taxes on the federal tax code and thus a tax cut translates into a loss in revenue for them and consequently, a cut down in expenditures, ultimately depressing the economy.

Stiglitz not only criticizes the Bush Tax cuts to the fullest extent but he also provides an alternative means of tax cuts that would stimulate the economy and promote equality. The goal of a tax cut should be to get money through the tax system to those who will spend it and spend it quickly; such as the unemployed, the cities and states that are starving for funds and lower-income workers. A strong tax cut would also need to be equitable. Stiglitz proposes an investment tax credit, that would be incremental and would go only to corporations and individuals that increase their investments. Evidently, this proposed policy is far different from the one Bush proposed. In my opinion, this policy appears to be much more practical and effective in comparison to the Bush tax cuts as it targets the population in need and creates equality.

When looking to taxes and different types of taxation it is important to notice that there are a large number of taxes, in terms of rates and on different aspects of the economy; inclusive of progressive, regressive, flat tax categories and specifically things such as sales taxes, corporate taxes, dividend taxes, estate taxes, transfers taxes and tariffs. An important piece of economic theory relative to taxes in general is the Laffer curve. It is of course debatable however this theory would show that the tax rate that generates the greatest amount of revenue is not 100% but rather a compromise tax rate.

In my opinion it’s not that easy to find a tax cut that would be the best in terms of stimulating the economy and reducing the level of income inequality. However, its general characteristic could be described. It would be one that would cut taxes for the poorest citizens and states/localities, as they will be the ones with the greatest propensity to consume and will be more likely to spend their increase in income. Furthermore, by cutting taxes for the poorer citizens it will further create equality in society. As such, this is very similar to the proposed tax cuts that Stiglitz proposes in his article.

In conclusion, it is quite remarkable to see how poorly President George Bush utilized his surplus to help his nation. Bush’s tax cuts failed to stimulate the economy and actually in turn, negatively impacted society by creating further inequality. Moreover, Bush failed to bolster the medicare and social security institutions and to increase the automatic stabilizers that would help the nation in midst of recession. In the end, Bush’s tax cuts were simply a disaster and in order for fiscal policy to be utilized properly, tax cuts must be imposed in the way Stiglitz and I have proposed them to be. Let this be a lesson learned.