Though Yale professor Gustav Ranis maintains that President Bush’s tax cut plan is “dead on arrival,” Ranis and professor Christopher Udry have joined hundreds of economists who hope to secure the proposal’s demise.
The two Yale professors pledged their names in opposition to the plan Tuesday in a full-page advertisement that ran in The New York Times.
The ad, sponsored by the nonprofit Economic Policy Institute and signed by 10 Nobel laureates, warned that the tax cuts will increase the nation’s projected deficit, exacerbate inequality across income distribution, and bankrupt Social Security, Medicare and Medicaid.
“It is insufficient stimulus in the short term,” said Ranis, who serves as director of the Yale Center for International and Area Studies. “It provides for huge deficits in the long run and endangers the long-term course of the economy — We have a completely irresponsible budget.”
As it stands, the Bush plan would make permanent the tax cuts Congress passed in 2001 and eliminate the dividend tax altogether. Bush has said the tax cuts would stimulate growth, while eliminating the dividend tax would promote spending and avoid overtaxation.
Ranis explained that although tax cuts generally jump-start the economy, the Bush plan inordinately benefits the wealthy, who are less likely to spend money than those in the middle- and low-income distributional brackets. The plan also does not take into account the substantial cost of a possible war with Iraq, Ranis said.
The proposed elimination of the dividend tax — which taxes company profits distributed to shareholders — has generated much of the contention over the plan.
Ranis said 80 to 90 percent of stocks are held by the rich, challenging the administration’s claim that many middle- and low-income Americans own stock and that the dividend tax would benefit them as well.
“The Bush Administration claims that getting rid of the dividend tax would be stimulative, but it’s not,” Ranis said. “They’re using statistics in a somewhat misleading fashion.”
In addition to its short-term detriment, the tax plan would hurt the economy in the long-run, the economists argued.
The budget deficit, which appeared under control at the end of Bill Clinton’s presidency, is again a subject of concern for economists. Ranis and Udry said the current plan will neither stimulate the economy nor generate increased federal revenue, leaving the government unable to pay for social services.
“It’s going to be disastrous for the generation that is looking for support down the road,” Ranis said.
As an alternative to the Bush plan, Ranis suggested providing income tax cuts for mid- and low-income groups, extending unemployment benefits, and offering tax credits for investment. What the economy does not need, Ranis said, is for Bush’s previous tax cuts to become permanent.
“That’s a real mistake,” he said.
Ranis said history showed how the tax plan would hurt the economy.
“The Bush people have this kind of supply-side economics, which says that if you support the wealthy and their investors, they will generate more growth and out of that growth, you can have higher tax revenue,” Ranis said. “[Bush] is basically repeating the Reagan tax policy, which was disastrous.”