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Business Picks Bush’s Tax Plan Over Greenspan

The White House continues to push for Congress to enact $670 billion in tax cuts, despite Fed chairman Alan Greenspan’s detracting remarks.

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WASHINGTON — The Bush administration showed no sign Thursday of backing off its push for Congress to enact $670 billion in tax cuts to stimulate the sagging economy, as controversy over the proposal rages.

Already facing strong opposition from Democrats on Capitol Hill, the White House was smarting from Federal Reserve Board chairman Alan Greenspan’s remarks in Congress this week that threw cold water on President Bush’s plan.

Worried about increasing federal deficits, further harming the economy and triggering interest rate hikes, Greenspan said the centerpiece of the President’s plan — elimination of tax dividends at a cost to federal coffers of $358 billion over 10 years — should be paid for by increasing other taxes or reducing government spending.

Newly installed Treasury Secretary John Snow, in a Thursday speech before the Detroit Economic Club, called the dividend proposal “the key to job creation.” Taxation of stock dividends discourages investment, providing less money for companies “to expand and create new jobs,” Snow said.

The administration said the growing federal deficits, expected to reach more than $300 billion this year and reversing a government surplus, will be short-lived once the economy climbs from the doldrums. The elimination of the dividend tax — or the rest of Bush’s plan that calls for accelerating $1.3 trillion in tax cuts passed two years ago and spread over 10 years — has drawn mixed responses from economists.

On Wednesday, the President in a speech to small investors, boasted of a letter from 250 economists backing his plan, intending to refute a statement to the contrary released earlier by 400 economists and published in major newspapers.

Martin Regalia, chief economist with the U.S. Chamber of Commerce, where support for the President and Republican proposals runs high, said further tax cuts “will put more money in consumer hands, put more capital in firms by boosting investment and will boost the stock market. It’s a very balanced plan.”

Regalia said Greenspan’s worries about the downsides of tax cuts resulting in higher deficits and interest rates, as well as less money for retirees’ federal health care and social security, are overdrawn. He also criticized the Fed chairman for not always being prescient and faulted Greenspan for not making larger interest rate cuts sooner to head off last year’s brief recession.

The much-revered Greenspan “is not God,” Regalia said. “He may come close and some people may see him in the archangel range. I would rather err on the side of a little more economic growth. Deficits don’t become problems if they are transitory. The way you do that is control government spending.”

Carl Steidtmann, chief economist at Deloitte Research, said he is “more in agreement with Greenspan” and his concerns about long-term deficits resulting from long-term tax cuts. Steidtmann said the uncertainty among consumers regarding a looming war with Iraq is the biggest drag on the economy, however short-term “tax reduction is something that would probably have a beneficial effect.”

Yusuke Horiguchi, chief economist with the Institute of International Finance, said Greenspan can’t be faulted for concerns about government deficits and the impact, among other things, they might have on social security and federal healthcare benefits for Baby Boomers retiring in the next 10 years.

“I agree with that thrust of reasoning,” said Horiguchi, adding: “The long-term fiscal prospect of the United States is not a rosy one and the utmost care is therefore needed to make sure the fiscal policy [is sound].” However, Horiguchi said some kind of economic stimulus may be needed “that might come from higher oil prices” and costs resulting from a war with Iraq.

Frank Badillo, senior economist at Retail Forward Inc., questioned the size and scope of Bush’s tax-cut plan and said he joins Greenspan in his concerns.

“There are difficulties in the timing of tax cuts and maximizing the effect when the economy needs them,” Badillo said. “They are an awkward tool to stimulate the economy.”

Bush’s tax plan is just beginning to wend its way through Congress. While some moderate House Republicans grumble about its scope and necessity, the proposal’s biggest hurdle is expected in the Senate, where GOP moderates there provide a more formidable opposition.

Steve Pfister, senior vice president of government relations at the National Retail Federation, said the association continues to back Bush’s tax plan.

“We still feel that to bolster a flagging economy the federal government needs to take steps to give Americans the ability to keep and spend more of the money they make,” he said. “I won’t dispute the war in Iraq from a macroeconomic policy standpoint remains to be a large question mark concerning our national economic picture.”

In New York, manufacturers generally favored the tax-cut plan as a way to help the tough retail picture.

“I think the tax cut will help,” said Gregg Marks, president of Kasper. “It’s a short-term fix, but anything that will help the economy and put more money in people’s pockets is a good thing. In the long run, the only thing that will help the economy is for people to spend and that creates jobs.”

Donald Levy, president of The Levy Group, said, “I love the idea of ending double taxation on dividends. That would be terrific for our marketplace. Once they do that, stockholders will get real rewards for their shares. It will change the way companies are valued and will make a much happier marketplace. The way it is now you’re only getting money back if the stock goes up. It’s like a casino.”

On the downside, Levy said he is opposed to having a huge deficit. That said, he considers the war on terrorism and the Office of Homeland Security to be an “incredible priority” that will require “a heavy investment for a very long time.”

James Martin, president of apparel fabrics at Dan River Inc., said the tax-cut issue is a thorny one, particularly in light of the threat of a war with Iraq, which would place a heavy burden on the federal treasury.

“We’re in a recession and I know when you’re in a recession what you have to do is cut back,” he said. “You have to spend less. “Is cutting taxes the way to spend less? I don’t know, because they have [cut taxes] before and the government doesn’t seem to stop spending. You shouldn’t be creating a deficit. You need to run a balanced business.”

Amit Asudo Datwani, vice president of SoHo Compagnie, a moderate sportswear company, said, “From a business standpoint, I definitely think it would help stimulate the economy.”

Datwani said tax breaks would create more disposable income, which he hopes would filter back into the economy, and “eventually that would stimulate business. That’s what we need.”

Thomas Burns, president of Ballinger Gold, said, “I think any tax cut is positive. The question is whether it is a short-term or a long-term fix. The biggest tax issue we have right now is the cost of energy that is absolutely skyrocketing. Whatever tax cut we may get is going to be offset by the increase in oil, gasoline and natural gas.”

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