SYNOPSIS: An interview with Paul Krugman and the very nasty Newt Gingrich over W.'s second "stimulus" plan to abolish taxes on dividends

GEORGE STEPHANOPOULOS, ABC NEWS: President Bush's budget team is working overtime this weekend trying to make the numbers work in his new stimulus package. The President will make final decisions after returning to Washington this afternoon but for now he's still at the Crawford ranch where ABC's John Cochran has been scouring the brush for details on what Bush will do. John?

JOHN COCHRAN, ABC NEWS: Good morning, George. You know, some of the President's more cautious aides try to convince him that when it comes to economic stimulus, less is more. No decided the President. More is more. Up to $600 billion over the next 10 years. About half that amount may be set aside for spending. Billions to help state governments overwhelmed with paying for Medicaid and homeland security measures and billions more to extend unemployment benefits which expired at the end of the year. Those are the least controversial of the Bush proposals. His tax cuts are another matter. The President's package is expected to call for speeding up income tax cuts already scheduled to take effect next year. Encouraging business expansion by permitting companies to write off expenses more quickly and reducing the taxes shareholders pay on dividends by 50 percent or more. There he goes again, say the Democrats, helping the rich.

SENATOR TOM DASCHLE, DEMOCRAT, SOUTH DAKOTA: Anyone who makes more than $1 million a year would get a tax break of $24,000. People making between $40,000 and $50,000 a year would get $76.

JOHN COCHRAN: (Voice Over) The President's aides dispute those figures and say he may offer the less well off additional breaks such as child care tax credits. But he is not apologetic about including the wealthy in tax relief.

PRESIDENT GEORGE W. BUSH, UNITED STATES: You know, I understand the politics of economic stimulus. Some would like to turn this into class warfare. That's not how I think.

JOHN COCHRAN (Off Camera): So, George, are we some seeing arrogance from the White House? No said an Administration official. What you are seeing is confidence. The official said during the November Congressional elections the Democrats had the chance to play that class warfare card and they bungled it, they lost. The President won, said the official, and he's going to act like he won.

GEORGE STEPHANOPOULOS: Thank you, John. And joining us now to debate the President's plan are former House Speaker Newt Gingrich and columnist Paul Krugman of "The New York Times." And Paul, let me begin with you, you heard that quote from John Cochran. The President won and he's gonna act like he won. But is this stimulus package the right thing for the economy now?

PAUL KRUGMAN, NEW YORK TIMES COLUMNIST: It looks to me as if they sat down, drew up a list of everything that you really needed to do for the economy and then said, let's do the opposite. I mean, it's amazing. What you want to do is you want something first of all that comes fast, that's concentrated on this coming year, not on the distant future. You want something that helps the people who are most in need and you want something that puts money up in the hands of people who are likely to spend it. What they've actually got is a plan which is a permanent, the core of it seems to be a permanent cut in this dividend tax which is not focused on the near term. It goes to the people who are least likely to spend it and of course is not, the really crucial areas are unemployment, the unemployed are suffering largely because of neglect by the White House, and the state budgets. Now we hear there's gonna be token stuff for those in the plan, but, gosh, this really looks like another Karl Rove special. Use a crisis to sell an irrelevant policy, that's the usual agenda.

GEORGE STEPHANOPOULOS: Former Speaker, you can't be more definitive than that. You got it all wrong, you gotta get back here.

NEWT GINGRICH, FORMER SPEAKER OF THE HOUSE: Let me say first of all it's fascinating that the Democrats have opposed a plan, which we were just told by John has doubled in size this weekend so they don't know what's in the plan but they know it's wrong and they are so certain it's wrong they'll even tell you in detail what it's wrong even though they haven't seen it and even though it's different than the plan on Friday they thought they were gonna get.

GEORGE STEPHANOPOULOS: What's right about what you were asking?

NEWT GINGRICH: Let me just start then, the President's second biggest job after national security is get this economy growing back to creating jobs, back to increasing take home pay. I would argue that eliminating, abolishing the double taxation of dividends is very important when four companies, Microsoft, Cisco, Dell and Intel have $80 billion locked up sitting there in cash, not going back to the stockholders. That's just plain wrong. Furthermore, over half the money last year of taxable income on dividends was for senior citizens, people over 65. Now, maybe Mr. Krugman who will argue passionately seniors ought to get money from the government, doesn't think that they ought to get money from their own stocks but it seems to me that if you can create a system where the money goes back to the stockholder and goes back to the 401(K) holder, goes back to the person saving for retirement or the person who is retired, that's good. If you send a signal to economic management, invest the money, use the money but don't just sit there hoarding it as cash, that's good. And frankly, the country in the end would rather have long-term economic growth as long as we get out of this recession, which by the way started in the Clinton Administration, it's not the Bush recession. As long as we get out of this recession and get back to a growth curve, I think the country would rather have long-term growth than short-term micro stimulation.

PAUL KRUGMAN: Can I, I just, two really important things here. If you're a 401(K) holder this is irrelevant. The dividend tax elimination does nothing for people who are in 401(K)s. 'Cause that's already tax sheltered. This is only for those people who have lots of stocks, that are not in their 401(K)s, which means, yes, a lot of them are older people. But they happen to be very rich older people. Do you really have to do that business about the recession? It's not really important but did officially start in March 2001.

GEORGE STEPHANOPOULOS: How about though on this argument about the ending the dividend tax and "Time" magazine reports this morning that the President may go all the way and just eliminate it. The fairness argument. They make a simple case that income shouldn't be taxed twice.

PAUL KRUGMAN: Let's just talk about, if they really go all the way to doing it, then the only tax on your income that's put in the corporation is the corporate tax which has been withering away. The real effective rate on corporate profits is about 15 percent which means you're gonna take the biggest source of income for the richest people and it's going to be taxed at only a 15 percent rate. That sounds like half taxation, not double taxation.

NEWT GINGRICH: Let me go back to your point about 401(K)s, if you have a system where corporate management is expected to pay the dividends, more dividends will go into the 401(K)s than currently. This is a standard marginal cost of how a behavior occurs. Now, maybe you don't believe raising taxes changes behavior but it seems to me that every economist I know thinks that marginal costs matter. Abolishing the double taxation of dividends increases the likelihood corporations will pay the dividends, changes the nature of buying stock from a pure valuation bubble back to what's the long-term return and that is I think a much healthier system.

PAUL KRUGMAN: Any change of government policy affects incentives. If you're really worried about incentives, this would not be in your top ten things you would worry about. You would be worrying about the extremely high rates of effective marginal taxation on the working poor, you'd be worried about a lot of quirks in the tax system. This is a real, you know, this comes out of, I was about to say comes out of nowhere, it comes out of the fact that this is what Charles Schwab proposed to George Bush at that Crawford summit and what we're seeing here is, of course, what kind of people have the ear of this Administration. The people who really need help don't get invited to Crawford. The people who, you know, I already have a lot, but would like to have even more do get invited.

NEWT GINGRICH: I understand class warfare is a necessary requirement to be a modern, certified Liberal, but let me just point out, a tax in which over half of the money paid last year was paid by people over 65 normally for Democrats would be almost, they couldn't . . .

PAUL KRUGMAN: Most billionaires are over 65, too. This is a misleading statistic, right? It's a tiny set of people who tend to be older. This is ridiculous.

NEWT GINGRICH: No, no, no, no, no, no, no, in fact, it's over a quarter of the people who are over 65 get substantial rounds of dividends. It's not just three or four billion.

GEORGE STEPHANOPOULOS: Let me get to one final point before we go. And I want to pose this question to you, Mr. Speaker. When you were Speaker, you worked very hard for a balanced budget amendment to eliminate the deficit. When President Bush was running he said we could afford the tax cuts because we have a surplus. Now we have a $600 billion package. It seems in the face of deficits the Glen Hubbard, the President's chief economist is starting to make this argument that deficits don't matter that much. What do you think of that argument?

NEWT GINGRICH: Well, having helped author the balanced budget of '97, I would argue that until you win the war, and you get back to economic growth and you reform health care, you're not gonna get to a balanced budget, so the three steps are, make sure we're safe on national security, make sure we get the economy growing again, reform the health system. You do those three things, you'll be in balance by the end of the decade. If you don't do those three things, you may not be in balance again for 20, 25 years.

GEORGE STEPHANOPOULOS: You get the last word on this.

PAUL KRUGMAN: And the day when we default on our debt, we're gradually turning into Argentina here. And each day they're saying, well, this is the right thing to do, and it was all part of the original plan. And somehow that tax plan that we drew up in 1999 as a way to fend off Steve Forbes, is still the ideal solution.

GEORGE STEPHANOPOULOS: Paul Krugman, Newt Gingrich, thank you very much. We'll be back with our roundtable after this.

Originally broadcast, 1.5.03