by John M. Curtis
(310) 204-8700

Copyright January 8, 2003
All Rights Reserved.

elling his new economic elixir, President George W. Bush prescribed another dose of tax cuts, boosting the child tax credit, alleviating the marriage penalty, accelerating rate cuts and, the most controversial of all, eliminating federal tax on stock dividends. With the economy stuck in neutral, Bush hopes to reverse the worse stock market slide since the great depression. "The job and growth proposals I've outlined today are a focused plan to encourage consumer spending, to promote small- business growth, to boost confidence in our markets and to give critical help to unemployed citizens," Bush told 2,200 business executives at the Economic Club of Chicago. Bush's proposal reinvents the "Trickle-Down" theory of Supply Side Economics, pushed by Reagan's old budget director Dave Stockton who inherited Carter's $63 billion deficit in1981, promised a balanced budget by 1983 and left office in 1989 with $160 billion in red ink.

     When Reagan passed the baton to George H.W. Bush in 1989, great expectations were dashed by a stubborn recession and ballooning deficits, leaving Clinton a $290 billion albatross in 1993. When Reagan took office in 1981, the Dow Jones Industrial Average was around 1,500; when he left office it was around 2,100, taking eight years to climb 500 points or roughly 25% or 3% per year. Market average performed better under Bush-41 with the DOW rising from 2,100 in 1989 to 3,500 in 1993, roughly 65% in four years or 13% per year. Things really jumped when Clinton rolled in 1993, with the DOW lifting off from around 3,500 and soaring to 11,500, increasing about 328% or 41% per year. But it was the Nasdaq that achieved the most spectacular gains, doubling from 750 in 1993 to 1,500 in 1997, but more than tripling from 1997 to 4,700 in March 2000, a whopping 625% increase or 78% per year.

     Now, three years into the worst stock market crash since the 1930s, the largely old-economy DOW stands at around 8,500, roughly 30% off its peak in March 2000. New-economy stocks as measured by the tech-rich Nasdaq stand around 1,400, about 70% off the peak or 1996-97 levels. Here comes the rub. With the Nasdaq's spectacular rise due largely to the anomalous Internet frenzy and dot-com bubble, expectations about future growth remain sober. Few analysts predict returns even close to the raging bull market in the late '90s, with gurus like Warren Buffett, optimistically predicting modest returns to historic averages, generally accepted at about 10%. When you subtract dividends, nominal market yields drop to 5%, roughly the same performance as U.S. treasuries over the last 70 years—without the risk. Most reputable economists credit Clinton's hefty surpluses to unprecedented capital gains from the dot-com bubble.

     Here's where things gets dicey. Bush's plan to eliminate federal tax on stock dividends sounds like good trickle-down logic, encouraging investors to stay in the market and spend more cash. Supply-siders believe reducing marginal tax rates, eliminating the marriage penalty and bumping up the child tax credit should stimulate the economy, giving tax payers more cash for consumer spending. Federal Reserve data indicate that 70% of the gross domestic product is based on consumer spending. Giving consumers more cash only makes sense. Yet, Bush's plan offers to eliminate federal tax on dividends affects around 70% of DOW stocks but only 30% of the Nasdaq's new economy stocks. Even tech giants like Cisco Systems or Oracle don't pay dividends. Since the market meltdown begun March 200, the White House should consider increasing capital loss deductions.

     Today's investors can only write off a maximum of $3,000 per year, despite incalculable equity losses totaling—for business and individuals—more than $8 trillion since March 2000. Increasing deductions for capital losses to $5,000 would give investors an additional $1,228 in write offs, based on a maximum tax rate of 38.6%, putting more cash into tax payers pockets. Neither Wall Street nor the Treasury is hot on that idea because it might encourage investors to get out the market and shrink tax revenues. With rising unemployment, dramatically reduced capital gains and growing military expenditures, it's unlikely that the same trickle down theory will pan out. While there's nothing wrong with stimulating the economy, bigger deficits risk increasing interest rates by forcing the government to compete in private capital markets, ultimately slowing growth.

     Political concerns about a faltering economy upending Bush's chances in 2004 seem exaggerated, considering his current approval ratings exceed 60%. Conventional wisdom held that Bush-41 lost to Clinton in 1993 because of lackluster economy. In reality, H. Ross Perot heisted 19% of the GOP and crossover vote, handing the election to then Gov. Bill Clinton. Clinton prevailed with only 43% of the vote. Every president wants a robust economy, but a popular wartime president with a stunning victory in Iraq should be well positioned in 2004. Barring an unexpected run by a popular third-party candidate, Bush won't face the same challenges that undermined his father in 1992. While there's nothing wrong with new bromides, eliminating tax on dividends won't make much difference. If the White House really wants to jumpstart the economy, they should look again at increasing capital loss deductions.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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