The check is not in the mail just yet, but President Bush clearly hopes to get more cash in the pockets of working Americans soon with his economic stimulus plan announced Tuesday.
MUCH OF THE EARLY discussion of Bush’s plan has focused on his proposal to eliminate taxes on corporate dividends, a feature that would have little immediate pocketbook impact, although it already has given a boost to the stock market.
But the administration’s proposal to accelerate income tax reductions, if passed, would increase take-home pay for wage earners beginning shortly after it is signed into law, Bush said in unveiling the plan. And if Congress passes Bush’s proposal to immediately boost the child tax credit to $1,000 from $600, 34 million families would get a check equal to $400 per child, similar to the tax rebate checks that were mailed out in 2001.
“These tax reductions will bring real and immediate benefits to middle-income Americans,” Bush said in a speech to the Economic Club of Chicago. “And the sooner Congress acts, the sooner the help will come.”
The main elements of Bush’s proposal, including the dividend tax reduction, would be retroactive to Jan. 1, 2003, but without further action that would mean little more than a windfall in tax refund checks in early 2004.
“That’s not when the stimulus is needed,” said John Silvia, chief economist at Wachovia Securities. “The stimulus is really needed pretty much right now.”
So Bush said that if Congress passes the package he has proposed, he would immediately order the Treasury to adjust paycheck withholding rates, boosting take-home pay within just a few weeks.
“That suggests he’s going to try to get this thing through pretty quickly,” said Silvia. That might be overoptimistic, of course. Even with Republicans controlling both houses of Congress, the scale of the Bush plan means likely tough partisan battles, and early action could be a tough challenge unless the White House is willing to break the stimulus plans into more digestible pieces, Silvia said.
Sen. Max Baucus of Montana, the ranking Democrat on the Senate Finance Committee, said he expected “some compromise” on the issue of dividend taxes. “But I do think that it’s important for us in the Congress as well as the president to focus on short-term, right now, stimulating the economy,” he told CNBC.
White House officials said the plan would inject about $98 billion into the economy over the next 16 months, with 92 million individual taxpayers getting an average of $1,083 in tax relief this year.
The biggest sticking point for Democrats so far is the proposal to eliminate the tax on corporate dividends, which accounts for nearly half the plan’s cost, estimated at $674 billion over the next 10 years.
Democrats contend the benefits of the dividend tax break largely would go almost exclusively to the nation’s wealthiest families. And private analysts noted that working Americans who own stocks hold them chiefly in retirement accounts that already are sheltered from taxes.
The White House offered a arguing that about 35 million of the nation’s 105 million households receive taxable dividend income, and that more than half goes to senior citizens, “many of whom rely on these checks for a steady source of income in their retirement.”
Stock prices already are up 5 percent this year, based partly on the dividend proposal, which was a major surprise when it was disclosed last week. But a complete elimination of the tax is considered unlikely, and it probably is an area where the Bush administration is willing to compromise, analysts said.
“Wall Street has not fully priced in the elimination of the dividend tax,” said economist Stephen Stanley of Greenwich Capital Markets. He said investors currently are assuming the tax on dividends will be cut in half and said stock prices could rise further if momentum builds for complete elimination of the tax.
Sam Stovall, investment strategist for Standard & Poor’s, said the stock market impact of any improved tax treatment of dividends would flow mostly toward large companies, as smaller companies are less likely to pay dividends. Of the 500 largest U.S. companies, 70 percent pay dividends, compared with only 40 percent of the companies in S&P’s Small Cap 600. Utilities, telecom service providers, and energy and materials companies generally offer the highest dividend yields and so presumably would be the biggest beneficiaries.
Stovall also said the reduction or elimination of the tax on dividends likely would inspire more companies to pay dividends or boost existing payouts, reducing the risk of equities and making them a more attractive investment.
Margaret Richardson, a Washington-based partner in Ernst & Young’s tax practice, cautioned that eliminating the dividend tax could have unintended consequences. If dividends were tax-free, stocks with high payout ratios could become so attractive they would compete with tax-free municipal bonds, hurting a major source of funding for states and municipalities that already are strapped for cash.
She also said it was “disappointing” that any thoughts of tax simplification apparently have been abandoned for the current round of stimulus.
“When you add credits and add deductions and do different tinkering with the tax code, you make it more complicated rather than less complicated,” she said.
Any changes in payroll tax withholding could be implemented within a few weeks after Bush signs a stimulus plan into law, based on the 2001 experience, making it one of the fastest ways to inject cash into the economy. Rebate checks would take somewhat longer: In 2001 taxpayers received their checks anywhere from six to 15 weeks after the bill was signed.
In addition to eliminating the dividend tax and reducing tax rates, Bush’s plan would seek to help individuals and small businesses by:
Reducing the marriage penalty. Congress has already approved this change in the tax code, but it is not scheduled to become effective until 2009. The White House did not specifically say how much this would benefit taxpayers, although it said 46 million married couples would receive an average tax cut of $1,716 under its proposal.
Creating new “Personal Re-Employment Accounts” worth up to $3,000 each to benefit at least 1.2 million of the nation’s unemployed workers. The money could be used for training, transportation, child care or other expenses associated with finding a new job. Workers who find a new job within 13 weeks would be able to keep any balance in the account as a “re-employment bonus.” The novel idea is seen as a way to counteract any incentive for people to remain jobless while they are eligible to collect unemployment benefits.
Increasing the amount small businesses can expense for equipment purchases each year to $75,000 from $25,000. This could jump-start spending on business equipment but likely would take some time to have a significant impact.