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Class Warfare
January 14, 2003
By Eric Munoz

As a part of the $600 billion economic plan to stimulate our economy, George W. Bush seeks to eliminate the income taxes paid on the income from dividends. Why it is that income derived from money lending is any more special than income derived from being a waiter, a teacher or a policeman is beyond me.

For example, according to the Detroit News, the five heirs to the Wal-Mart fortune stand to save a combined $984 million dollars on $2,500,000,000.00 in income. My mom, who works at Wal-Mart, will be asked to pay 10% of her taxable income; she makes just over $18,000 a year. Under this plan my mom will pay a couple of hundred dollars in income taxes, the five Walton heirs will not pay one cent of their $2.5 billion in dividend income.

Of course, the administration has already developed its two word defense for comparisons like the one above - "class warfare." If it is considered class warfare to point out that this plan would give the top 5% nearly half of this economic "stimulus" package, I wonder what we should call the plan itself. We already have a situation where the rich continue to get richer while the poor and middle class continue to get poorer, as Robert Reich recently pointed out in the LA Times, "at the top is a regal class with more wealth and income than any aristocracy has ever had." George Bush's plan would only exacerbate that problem. According to the Institute on Taxation and Economic Policy tax model, nearly half of the plan's benefits go to the very, very well off and over three quarters goes to the very well off: 32.4% to the top 1%, 47.6% to the top 5% and 77.3% to the top 20%. The rest of us, the bottom 80%, split up the remaining 23% of the benefits.

But not only does this plan tilt heavily toward the rich, it is also far from clear that it will be stimulate the economy at all. Furthermore, the plan may cause more problems than it claims to solve.

The administration will no doubt argue that the tax cuts will lead to higher stock prices and more investment which will lead to more jobs. There's only one problem. We do not need anymore capital-we need consumption. The Federal Reserve Board's monthly Capacity Utilization report shows that we are operating at 75% of potential capacity. That means that 25% of factories and machines are not being used. What company in their right mind would go out and buy more machines or open new factories when it is not even using all of the ones they have now?

There are also some serious potential impacts of the Bush economic plan. The biggest impact will be felt by state and local governments at a time when they are already facing a combined $50 billion budget shortfall. First, many states with income taxes follow federal guidelines, if the federal government stops imposing income taxes on dividend income most states will be forced to stop collecting these taxes as well. Second, if stock prices do increase - that's a big if, by the way - then local bonds will become less attractive to investors, depriving local governments of yet another revenue source.

The states will be forced to do one of two things: raise taxes or cut services. Because of the increased security needs, education mandates from the federal government and rising health care costs, it will be next to impossible for state governments to cut services. States will then be forced to raise sales or income taxes. Sales taxes are inherently regressive, meaning that the poor and middle classes pay a far greater share of their income toward these taxes. States that already collect income taxes may be forced to raise their rates; those that do not may be forced to start collecting them.

The elimination of income taxes on dividend income will disproportionably benefit the already well off at too great a cost. Deficits have returned and the national debt is growing again. With the war on terror and the looming war on Iraq, there is little chance deficits will be replaced by surpluses. We cannot continue to mount debt on our children and our grandchildren.

There's an old saying: "if you find yourself in a hole, stop digging." Right now this country is in a hole, a big debt hole that's only getting bigger. We need to decide, as a nation, whether we want to get out of this mess or not.

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