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January 15, 2003

I don't usually do this, but I'm going to reprint an entire article here. It's a very good one from my pals at Eat the State. It will probably be posted to their website soon, but I think it's so important that it should be available for reading immediately. It's about how the Bush economic stimulus plan could do more than just "not stimulate" the economy, it could shipwreck the damn thing. I'm actually kind of scared now.

Anyhow, the article.

----
A Tax-Cut That Would Sink the Economy
by Maria Tomchick
ETS Vol.7, No.10

The US media is expending a lot of ink and air time evaluating the potential economic effects of George Bush's new tax-cut proposal. So far, most of the discussion has centered around how much economic stimulus the plan will provide and how long it will take to work. No one, however, is discussing the very real possibility that George Bush's tax-cut, especially the elimination of taxes on dividends, could harm the US economy and drive it deeper into a recession.

To understand how this might happen, let's look at consumer spending, the one thing that's kept the US economy afloat amidst massive layoffs and corporate bankruptcies. Low interest rates are primarily responsible for keeping consumer spending alive; big-ticket items--like new homes and cars--are a great bargain right now because of low rates on mortgages and auto loans. Despite the worst Christmas shopping season for retailers since 1970 (when the government began to keep track of shopping patterns), consumer spending is still going strong.

The Bush plan could change that by raising interest rates. Removing the tax on dividends would make dividend-paying stocks more attractive to investors than interest-paying investments: bonds, certificates of deposits (CDs), money market funds, treasury bills, bank savings accounts, etc., which are all taxable. To attract investors to those interest-bearing investments, interest rates would have to rise to offset what people pay in taxes. So banks and finance companies, corporations, and the federal government would have to pay more interest on their debts.

To recoup some of that interest paid out on CDs, bonds, savings accounts, etc., banks and finance companies would have to raise the interest rates they charge on home-equity loans, auto loans, credit lines, credit cards, and business loans. Mortgage rates would rise, too. Rising interest rates could stop the hot housing market in its tracks, just as increased rates on auto loans would make people decide to drive their old car a little while longer than they're inclined to do today. As finance companies raise the rates on credit cards, more Americans would spend less on new purchases and focus instead on paying down their credit card debt. This would send consumer spending into a tailspin.

Currently, low interest on corporate bonds and bank loans to businesses have allowed many debt-ridden companies to continue to make payments on their debts. Once interest rates rise, however, companies that are just barely keeping their heads above water could find themselves squeezed from both ends: lower consumer spending would mean lower profits, while higher interest rates would mean the companies would have to pay more to banks or to investors on their debts. This could start a second wave of corporate bankruptcies.

Meanwhile, another fallout of cutting taxes on dividends would negatively effect state and local governments. Currently state and local governments, which are required to balance their budgets and not operate in at a deficit like the federal government, are struggling to plug enormous gaps between their incoming tax revenue and their increasing expenses. The Bush tax-cut plan could make those gaps even wider.

Here's how: state and local governments, including school districts, fire districts, and cities, have the ability to issue municipal bonds to pay for special projects, construction, and even operating costs. For example, the State of California has just issued bonds to help it pay for the high energy costs the state incurred during its recent energy crisis.

Municipal bonds are tax-free for the investor, making them highly attractive investments--there's no shortage of people who want them. Because they are one of the few tax-free investments available, municipal bonds carry very low interest rates, and this helps state and local governments keep a lid on their debt costs.

But once the tax on dividends is removed, the picture changes. To attract investors and compete with dividend-paying stocks, municipal bond interest rates would have to rise. State and local governments would then have to pay higher interest expenses to investors, putting even more of a pinch on their budgets. Returning to our example, if the Bush tax-cut plan passes, the State of California could face bankruptcy.

Notably, state and local governments are major employers and major spenders in nearly every community in America. Taking this into account, the Bush tax-cut plan could have the effect of destroying jobs and curbing spending at levels not seen since the Great Depression.

But it gets worse. When state and local governments are pinched and forced to cut services to the poor, homeless, and unemployed during an economic downturn, the nonprofit sector usually steps in to help. Nonprofit groups--from food banks and homeless shelters to groups providing job training and education services--subsist on donations primarily from wealthy people. But once dividends become tax-free, many wealthy people will no longer have an incentive to make charitable contributions to offset their taxable income. Nonprofits would suffer a severe funding shortage at a time when their services are needed more than ever.

The Bush administration argument for this tax-cut plan has focused on its ability to boost the stock market. Yet a jump in the stock market doesn't usually lead to a recovery, it usually reflects a recovery that's already in progress. Most economists agree that corporate profits have to increase in order for a recovery to begin. And an increase in consumer spending across all sectors would boost corporate profits immensely.

The Bush plan, however, puts money into the hands of people who simply can't spend it. According to the Center on Budget Policies and Priorities, the richest 5% of Americans would receive two-thirds of the tax cut. These are people who have already reached their top limit on spending; they simply can't spend all the money they earn in a year. Most of his tax-cut, then, would have no effect whatsoever on consumer spending.

Any tax-cut, even one that was more equitable and aimed at people who are lower on the socio-economic scale, would have a minimal economic stimulus effect, because during economic downturns people tend to either save or pay down their debts when they get extra cash. Bush's 2001 tax cut proved that.

It was a $1.3 trillion tax break that gave back $300 to every working American--much more than most people will see from his new plan--yet it did nothing to stop the economic downturn prior to September 11. A better proposal would be to take a portion of the current tax-cut plan, maybe half (or about $300 billion), and simply give it to state and local governments to help them plug the holes in their budgets, pay wages to employees, and build infrastructure like roads and schools. This would provide far more economic stimulus than the current plan, which would only exacerbate our current economic woes.

Posted by Jake at 01:04 PM
Comments

I hate to nay-say this doomsday proposal, but I think it relies on a fundamentally wrong foundation, namely that investors put money in bonds and CDs because of their yields. Investors put money in these investments because it is one of very few ways that they can stash large amounts of money without paying income tax on it, and without worrying about it.

People buy bonds so they can lower their taxable income, while still having cash that is close to liquid (in the case of short-term CDs). Moreover, people buy these investments when stocks are too tough to call, and seem like too much of a risk.

The reason we should be worried about this whole tax-free dividend issue is because it will provide a fantastic loophole for owners of fairly large business which have not previously offered stock. Instead of re-investing in their companies every year to avoid taxation, they will increase their dividends. For owners with large controlling interests in their companies, like 60% or more, it will actually be cheaper to burn the entire company income on a dividend than to pay the IRS. This saves the government all the trouble of taxing the rich and paying the rich, by letting them just distribute the tax money themselves, before it's even collected.

Posted by: Jeremy at January 15, 2003 02:11 PM


"As finance companies raise the rates on credit cards, more Americans would spend less on new purchases and focus instead on paying down their credit card debt. This would send consumer spending into a tailspin."

Nothing spells revolution better than living within your means--and then finding your means are, like, really really small.

Take it from a former credit-card addict, who thought there was something glamourously dangerous and devil-may-care about dropping hundreds of dollars I didn't have on things I couldn't afford (oh, plus college expenses like books and housing).

Now that I've gone into debt counseling and have consolidated all my cards and can't even apply for a card 'til they're all paid off---dude, living off just my shitty paycheck, with no help from the plastic, really blows.

We'll have a mass uprising in no time flat.

Posted by: michele at January 15, 2003 04:18 PM
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Media News

December 01, 2004

Media Mambo

The Great Indecency Hoax- last week, we wrote about how the "massive outcry" to the FCC about a racy Fox TV segment amounted to letters from 20 people. This week, we look at the newest media scandal, the infamous "naked back" commercial. On Monday Night Football, last week, ABC aired an ad for it's popular "Desperate Housewives" TV show, in which one of the actresses from the show attempted to seduce a football player by removing the towel she was wearing to bare her body to him. All the audience saw, however, was her back. No tits, no ass, no crotch, just her back.

No one complained.

The next Wednesday, Rush Limbaugh told his shocked viewers how the woman had appeard in the commercial "buck naked".

Then, the FCC received 50,000 complaints. How many of them actually saw this commercial is anyone's guess.

The article also shows the amazing statistics that although the Right is pretending that the "22% of Americans voted based on 'moral values'" statistic shows the return of the Moral Majority, this is actually a huge drop from the 35% who said that in the 2000 election or the 40% who said that in 1996 (when alleged pervert Bill Clinton was re-elected). This fact is so important I'm going to mention it over in the main news section too.

Brian Williams may surprise America- Tom Brokaw's replacement anchor, Brian Williams, dismissed the impact of blogs by saying that bloggers are "on an equal footing with someone in a bathroom with a modem." Which is really funny, coming out of the mouth of a dude who's idea of journalism is to read words out loud off a teleprompter. Seriously, if parrots were literate, Brian Williams would be reporting live from the line outside the soup kitchen.

In related news, Tom Brokaw has quit NBC Nightly News, and it appears that unlike his predecessor, the new guy can speak without slurring words like a drunk.

PR Meets Psy-Ops in War on Terror- in February of 2002, Donald Rumsfeld announced the creation of the Office of Strategic Influence, a new department that would fight the war on terror through misinformation, especially by lying to journalists. Journalists were so up in arms about this that the Pentagon agreed to scrap the program.

Don't you think that an agency designed to lie to the public might lie about being shut down, too?

This article gives some examples about the US military lying to the press for propaganda and disinformation purposes.

Tavis Smiley leaving NPR in December- African-American talk show host Tavis Smiley is opting to not renew his daily talk show on National Public Radio. He criticized his former employers for failing to: "meaningfully reach out to a broad spectrum of Americans who would benefit from public radio but simply donít know it exists or what it offers ... In the most multicultural, multi-ethnic and multiracial America ever, I believe that NPR can and must do better in the future." He's 100% correct. NPR is white. Polar bear eating a marshmallow at the mayonaise factory white. And the reason it's so white is that it is trying to maintain an affluent listener base (premoniantly older white folks) who will donate money to their stations. This is a great paradox of American public broadcasting, that they have a mandate to express neglected viewpoints and serve marginalized communities, but those folks can't donate money in the amounts that the stations would like to see.

U.S. Muslim Cable TV Channel Aims to Build Bridges- it sounds more positive than it is "Bridges TV" seems to simultaneously be a cable channel pursuing an affluent American Muslim demographic, and a way of building understanding and tolerance among American non-Muslims who might happen to watch the channel's programming. I was hoping it would be aimed more at Muslim's worldwide, but it ain't. Still, I'd be interested in seeing how their news programs cover the issues.

Every Damned Weblog Post Ever- it's funny cuz it's true.

Wikipedia Creators Move Into News- Wikipedia is a free online encyclopedia, created collectively by thousands of contributors. It's one of those non-profit, decentralized, collective, public projects that show how good the internet can be. Now, the Wikipedia founders are working on a similar project to create a collaborative news portal, with original content. Honestly, it's quite similar to IndyMedia sites (which reminds me, happy 5th birthday, IndyMedia!). I'll admit, I'm a bit skeptical about the Wikinews project, though. IndyMedia sites work because they're local, focused on certain lefty issues, and they're run by activists invested in their beliefs. I'm not sure what would drive Wikinews or how it would hang together.

CBS, NBC ban church ad inviting gays- the United Church of Christ created a TV ad which touts the church's inclusion, even implying that they accept homosexuals into their congregation. Both CBS and NBC are refusing to air the ad. This is not too surprising, as many Americans are uncomfortable about homosexuality, and because TV networks are utter cowards. But CBS' explanation for the ban was odd:

"Because this commercial touches on the exclusion of gay couples...and the fact that the executive branch has recently proposed a Constitutional amendment to define marriage as a union between a man and a woman, this spot is unacceptable for broadcast."

Whoa, what? First of all, the ad does not mention marriage at all. Second, since when do positions opposite of the Executive Branch constitute "unacceptable"? This doesn't sound like "we're not airing this because it's controversial", this sounds like "we're afraid of what the President might say."

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