Trickle-down's tricky math

Tax cuts focus heavily on dividends paid to the well-off, but Bush says the result will be jobs, growth.

By , Staff writer of The Christian Science Monitor

Does trickle-down economics work?

That in essence, is the fundamental question surrounding President Bush's new tax-cut plan.

The plan includes measures that would benefit a range of income groups, from the unemployed to parents. But the centerpiece of the plan - eliminating the tax on corporate dividends - is a move benefiting primarily well-to-do and upper-middle-class Americans who own stock outside of tax-sheltered accounts such as 401(k) retirement plans.

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A tax cut for the rich? Certainly. But Bush and his economic advisers say the goal is "jobs and growth" - that by encouraging saving and investment among the wealthy the economy will grow faster.

This theory has been a core element of conservative US politics since the days of Ronald Reagan. But how well it works is a question economists are still wrestling with. Growth has been generally strong from the mid- 1980s through the 1990s, but some of the strongest productivity gains came after a tax hike on the rich, in 1993.

In short, there are so many variables that affect the economy that researchers - often with political biases of their own - haven't reached a consensus on the merits of the conservative approach.

One thing is clear: The wealthy have been growing richer relative to the rest of Americans. And many believe the Bush plan will accentuate this trend.

During the booming 1990s, the income share of the nation's richest 1 percent of families rose so fast it now exceeds the total income of the bottom 50 percent. By one new Democratic estimate, the top 1 percent - those earning more than $313,000 in 2000 - got 17.8 percent of the nation's total income while the poorest half got 14.6 percent.

With the Democrats finally drafting their own decidedly different and more modest tax package - which might be called "trickle up" since it aims mostly at lower-income families - Americans will get a clearer choice on tax policy and its economic consequences than was available in recent elections.

Here's some math: Nearly half of the $674 billion 10-year cost of the Bush package arises from its plan to eliminate personal income taxation of corporate dividends. Of that, less than half of that is taxable, with the remainder stashed away in 401(k)s, IRAs, and other tax protected investments. About 42 percent of that tax savings will go to the top 1 percent.

The Bush cuts do offer significant breaks for those who are not wealthy. White House says its plan, with all its elements, would provide 92 million taxpayers with an average tax cut of $1,083 this year. A family of four with $39,000 in earnings could save about $1,100.

WILL the Bush tax cuts boost the lethargic economic recovery? Most economists would say yes. But some say the proposed measures are an inefficient use of the money for stimulus.

A Merrill Lynch study figures that when the bargaining in Congress is complete, the tax package will provide about $100 billion in stimulus. On top of that, discretionary spending on defense and homeland security will grow about $55 billion. That will be offset by a fiscal drag from the states and municipalities. Added up, the extra stimulus should add no more than 0.2 percent growth to the 2.6 percent growth the firm already projects for US economic output.

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