WASHINGTON, Feb. 4 (UPI) -- Ending taxation on corporate dividends will provide short-term economic stimulus while protecting long-term efficiency, the president's top economic adviser said Tuesday.
Democrats responded by arguing that the budget deficits proposed by President George W. Bush will damage growth.
Glenn Hubbard, chairman of the Council of Economic Advisers, told the Senate Budget Committee that strong economic growth was critical to the country's fiscal health.
"One of the most important lessons of the past several years is the importance of strong economic growth for the federal government's fiscal health," he said. "Accordingly, the central role for fiscal policy is to craft a tax policy that reduces tax-based distortions that hinder growth, while at the same time limiting the growth of government outlays to a sustainable path."
This explanation came amid widespread criticism by Democrats that the budget would mean record deficits.
"It will result in a fiscal chasm as the baby-boomer generation retires," ranking Democrat Kent Conrad of North Dakota said.
"This explosion in debt will make it far more difficult for all of us to conduct economic policy."
The Bush administration's plan would result in estimated $304 billion and $307 billion deficits in 2004 and 2005 respectively, both records. But Hubbard claimed that any risk posed by these deficits was worth the economic stimulus that would be generated by the tax cuts and spending boosts offered under the plan.
The administration has proposed accelerating the implementation of the tax cut passed in 2001, eliminating taxes on dividends paid to shareholders, and increasing small business deductions to stimulate investment.
The 2001 tax cut reduced taxes by $1.35 trillion over 10 years, and Bush has proposed accelerating these cuts -- and making them permanent.
Hubbard stressed that while the economy was stagnant in the past few years, the most recent quarter had shown a rebound and the proposed budget would stimulate growth over the short term.
"By focusing on the economy's most uncertain component -- business investment -- the president's proposals insure the recovery will proceed," Hubbard said. "Although the proposals focus on the economy's near-term needs, they also propose stronger growth in the long term as well."
But Sen. John Corzine, D-N.J., disagreed with Hubbard about the effect the dividend-tax cut would have for companies that pay dividends (and might be compelled by shareholders to increase them).
"The proposed dividend tax cut takes cash off the balance sheets of America's corporations that they need to hire and pay employees and to make capital investments. In these respects, the president's plan is very nearly anti-growth," said Corzine.
"In the most basic analysis, I don't see how this plan drives economic growth now -- when we need it."
