The Administration’s Economic “Stimulus” Proposals

Peter R. Orszag
Peter R. Orszag Vice Chairman of Investment Banking, Managing Director, and Global Co-Head of Healthcare - Lazard

January 21, 2003

Senator Dorgan, Ms. Pelosi, and Members of the Committee, thank you for inviting me to testify this morning on the Administration’s recent economic stimulus plan. As you know, that plan consists primarily of a new tax cut for dividends (and capital gains), and acceleration of most (but not all) of the provisions from the 2001 tax cut that were scheduled to take effect in future years. My testimony makes four basic points:

Even according to the Administration’s own analysis, the proposals would have a negligible effect on economic activity during 2003 and would reduce job growth after 2004. In the short term, the plan would have only a modest impact because it is not targeted to boosting demand for goods and services; in the long term, any positive effects would be offset by the expansion in the budget deficit and associated reduction in national saving.

The package is fiscally irresponsible, with a budget cost through 2013 of more than $925 billion (including debt service), and a long-term cost that exceeds one-quarter of the 75-year actuarial deficit in Social Security. These costs are in addition to the other substantial tax cuts already enacted or proposed by the Administration; collectively, the tax cuts amount to between 2 and 3 times the size of the actuarial deficit in Social Security over the next 75 years. Especially in the face of the coming retirement of the baby boomers, it would be reckless to adopt policies that would exacerbate the projected long-term budget imbalance.

The package would provide a tax cut of $100 or less to almost one-half of tax filers, while providing an average tax break of $90,222 to those with more than $1 million in income. The tax cuts would also reduce the share of total Federal taxes paid by the top 1 percent of the income distribution, and would widen the already substantial disparities in after-tax income between those at the very top end of the income distribution and others.

The dividend exclusion proposal would fail to achieve its ostensible goal of taxing corporate income once and only once. It would not address the component of corporate income that is not taxed (or is preferentially taxed), despite the fact that the non-taxation or preferred taxation of corporate income is arguably at least as significant a concern as double taxation. It would also undermine the political viability of true corporate tax reform and create costly new loopholes in the tax code.