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The President's Plans
Subject Tax policy
Topic Fiscal Policy
Key Words Fiscal Policy, Inflation, Tax Burden, Tax Cuts
News Story

With new economic advisors, John W. Snow as Treasury Secretary and Stephen Friedman as the leading White House economist, and Republicans controlling Congress, President Bush appears poised to push for tax policy changes. At the top of the President's agenda are tax cuts for business and individuals. President Bush is expected to propose lower taxes for corporate dividends, an acceleration of scheduled tax cuts, and more generous depreciation write-offs for corporations. Democrats, of course, have a different agenda, and will push the President to provide greater tax relief for the poor and middle class.

Although many are urging the Administration to apply short-term stimulus measures to support the economic recovery, the President's advisors are resisting such efforts. They argue that the economy is already on a path to recovery and tax cuts or other stimulus measures are unlikely to provide a needed push. Business investment, a sector important to the recovery and currently ailing, has not responded to the Federal Reserve's 12 interest rate cuts and is therefore not likely to be responsive to any tax cuts.

The President's proposed tax changes would provide modest stimulus. Lowering the tax on corporate dividends provides some relief and extra pocket money for consumers. It also makes stocks a more attractive investment, while reducing a distortion of the current tax system.

Consistent with his conservative philosophy, the President appears to be interested in longer-term tax reduction rather than quick stimulus packages. The expected package of proposed tax changes does not contain significant modifications of the current tax system. But the President is interested in greater change and R. Glenn Hubbard, chairman of the White House Council of Economic Advisors, is anxious to start on a proposal for a complete overhaul of the $1.8 trillion tax system. A flat tax on income or one based on sales or consumption, like the value-added taxes favored by European nations, have been proposed as alternatives. A simpler system would replace the maze of deductions, tax credits, and loopholes characteristic of the current system.


(Updated February 5, 2003)

Questions
1.

What is a flat tax? How does a flat tax work? Is a flat tax progressive, proportional or regressive?

2. Another proposal under discussion is the replacement of a tax system based upon income to one based upon consumption. What is a value-added tax? A sales tax? Is a value-added tax progressive, proportional or regressive?
3. Corporate dividends are said to be subject to double taxation. Explain. How would lowering the tax on corporate dividends benefit consumers?
Source Edmund L. Andrews, "President's Top Priorities: Tax Cuts, but No Quick Stimulus," The New York Times, December 16, 2002.

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