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Pratap Ravindran

Mr Bush measure will work out to billions of dollars in reduced capital gains taxes, a windfall that will go overwhelmingly to the rich and the super-rich.

PUNE, Jan. 27

THE US President, Mr George Bush's $674 billion economic stimulus plan which includes the elimination of taxes investors pay on dividends, is likely to have certain bizarre consequences.

It may be recalled that the Bush Administration has justified the stimulus plan in general on the basis of the argument that the role of government is not to manage or to control the economy from Washington, D.C., but to remove obstacles standing in the way for faster economic growth, and the tax elimination in particular - which will cost $364 billion in lost tax revenues over 10 years - on the grounds that the removal of double taxation on dividends could boost stock prices by at least 10 per cent, an important consideration in that roughly 35 million people in America receive income from dividends.

The Indian media, obsessed for various reasons by Mr Bill Gates, has carried foreign news agency and other reports that the founder and chairman of Microsoft stands to rake in about $100 million per year by way of additional income, potentially tax-free, after the software giant announced that it would begin paying annual dividends, something it hasn't thought necessary to do in the 30-odd years that it has been around.

However, it has not reported that while Mr Bush has described the centrepiece of the tax plan as the elimination of all taxes on stock dividend income, the actual provisions proposed by the administration are somewhat more complex, and include special benefits for certain kinds of companies - high-tech computer and software firms, for instance - that make massive profits but pay no dividends. In essence, the Bush plan allows the bigger stockholders in these firms to re-label a portion of their capital gains - normally taxed at 20 per cent - as unpaid or "deemed" dividends, which would then be tax-free. The provision is so complicated - its actual language is yet to be worked out - that there is considerable disagreement in the US business press as to the actual impact.

The complexity of the plan notwithstanding, one thing is clear: the measure will work out to billions of dollars in reduced capital gains taxes, a windfall that will go overwhelmingly to the rich and the super-rich.

Take the case of the Walton children, for instance. According to USA Today, each of the five children of the late Wal-Mart founder, Sam Walton, will, in all likelihood, save $197 million on their taxes under the Bush plan. The combined total comes to a breathtaking $984 million - nearly one billion dollars a year - in new tax breaks for one of the wealthiest families in America whose fortune is arguably derived from the exploitation of low-wage labour. The five Waltons stand to collect far more from the White House proposal than the nearly one million workers who are employed in Wal-Mart stores.

The funny thing here is that, according to the numbers generated by the Congressional Budget Office, several Washington policy analysts and the US President's own Treasury Department, of the $674 billion in tax cuts envisioned, as much as 65 per cent will go to the top 10 per cent of the population.

According to a report by Mr Patrick Martin the World Socialist Web Site published by the International Committee of the Fourth International, the Bush Administration, in the face of such numbers, has "pursued a policy of lying on a scale matched only by its propaganda for a US military assault on Iraq."

"Bush, Cheney and other officials have made declarations that distort or completely falsify the impact of the proposed tax cuts."

Substantiating this allegation, Mr Martin has referred to Mr Bush's January 9 statement: "You hear a lot of talk in Washington, of course, that this benefits so-and-so or this benefits this, the kind of the class warfare of politics. Let me just give you the facts, that under this plan a family of four with an income of $40,000 will receive a 96 per cent reduction in federal income taxes."

This, according to Mr Martin's report, is a gross distortion, because such a family pays a relatively small amount of federal income tax in the first place, barely $1,000.

"Middle-income working people without children would gain virtually nothing. By far the heaviest tax burden on families of such modest means, with or without children, comes from the federal payroll tax, which goes toward Social Security and Medicare, and from state sales taxes and other taxes on consumption. None of these will be reduced by so much as a penny, and most states will be increasing their taxes to cover huge budget shortfalls. The 40 million poorest families in America would gain zero from the Bush tax plan."

And then again, the US Vice-President, Mr Dick Cheney, had said on January 10: "The fact is that 54 million Americans own stocks that pay dividends. Moreover, 45 per cent of all dividend recipients make under $50,000 a year."

This, Mr Martin writes, is another huge distortion. "The vast majority of the 54 million Americans who own stock own very little of it, and receive only token dividend payments. Likewise, the 45 per cent of dividend recipients making under $50,000 a year collect a tiny proportion of total dividends. Some 62 per cent of all dividend payments go to the top five per cent of the population. The top one per cent of the population collects more dividends than the bottom 50 per cent."

Mr Martin goes on to point out: "(But) the biggest lie of all is the claim by the Bush administration that it has proposed this huge tax bonanza for the wealthy in order to stimulate the economy and create jobs. Even Wall Street analysts have pointed out that no such consequences are to be expected. The elimination of taxation on dividends, far from stimulating the economy, provides a financial incentive for corporations to increase their dividend payments to shareholders, thus reducing the retained earnings from which corporate investment is derived.

"Rather than stimulating investment and production, the Bush administration is rewarding precisely those sections of the ruling elite who derive the bulk of their income from speculation and stock market swindles."

As the Financial Times, hardly a voice of anti-capitalist sentiment, commented, the administration's claim that it was proposing an economic stimulus was "dishonest and seems to be designed to prevent a proper discussion of the long-term fiscal costs and benefits."

In at least one significant area, the Bush tax plan will directly undermine the US economy and exacerbate the social crisis. Eliminating the taxation of dividends will have a huge impact on the $1.8 trillion municipal bond market, a principal source of financing for state and local governments. The main attraction of municipal bonds has been the fact that, unlike dividends and corporate bonds, the income they generate is tax-free. Once stock dividends from private firms are no longer taxed, investors will tend to shun the municipal bond market. Some financial experts estimate that municipal bond rates will rise by at least a percentage point, adding billions in interest costs for already deficit-ridden local governments.

Incidentally, Mr Cheney will benefit to the tune of over $3,27,000, while Mr Bush himself will gain $44,500 under the stimulus plan!

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