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Tax cuts feeding economy or starving government?

John Dimsdale May 10, 2006

KAI RYSSDAL: The Treasury Department announced today it’s flush with cash. Income tax payments last month helped push government receipts to the second-highest on record. Which makes it kind of ironic the House and Senate have reached a tentative deal on tax cuts. The Republican leadership says it will extend capital gains and dividend tax cuts for another two years. The president says they are a big part of why the economy’s growing. We sent our Washington bureau chief John Dimsdale to find out if that’s true.

For conservative economists, like the Heritage Foundation’s Dan Mitchell, the lower taxes on capital gains and dividends passed in 2003 have created millions of American jobs.

DAN MITCHELL: This has been an enormously successful policy and it would be downright fiscal insanity not to extend these tax cuts so we can keep the good times going.

The current congressional agreement keeps the low taxes in place until 2010. By then, Mitchell’s counting on Congress to make them permanent. Otherwise, the economy gets hurt.

MITCHELL: I hope it will be too difficult to go back to the higher rates because if we don’t extend these tax cuts we’ll go back to the Clinton era tax rates. As other countries are cutting taxes, we’re gonna have a very tough time competing against China and India.

For those who worry about the lower taxes’ effect on deficits, Mitchell says: Don’t.

MITCHELL: I want rich people earning lots of income, and reporting lots of income. One of the consequences of that is the government gets more revenue.

ROBERT SHAPIRO: Heh. That’s not economics. That’s political ideology.

Robert Shapiro, a former deputy Commerce Secretary in the Clinton administration, says lower tax rates will starve the government and won’t generate any more economic growth.

SHAPIRO: We have had much higher rates of investment with higher tax rates. The financial corporations that are part of this have the highest profits in their history. They have plenty of money to invest without these additional tax breaks.

If Congress approves the tax-cutting deal, this debate over the revenue impacts of tax breaks is likely to be still raging in 2010.

In Washington, I’m John Dimsdale for Marketplace.

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