Nuts and bolts of Bush’s tax plan

President Bush’s proposed “growth and jobs” package of tax cuts and other incentives to encourage investment and consumer spending has raised a lot of questions. Will it benefit only the rich? Will ordinary Americans benefit? What about deficits and the impact on state and local governments? In an MSNBC Chat, Assistant Treasury Secretary for Tax Policy Pam Olson explains the fine points of the proposal, which would cost $674 billion over the next 10 years.

MSNBC-Will Femia: Welcome, Ms. Olson

Question from Ted Berner, Bensalem, PA: I have heard that taxing dividends is in effect taxing income twice. Is this true?

MSNBC-Will Femia: Help me understand the concept of double-taxing… the double taxing is the stockholder’s income is taxed, then the dividend from the stock purchased with that taxed income is taxed again? Or is it that the company’s income is taxed, and the profits, which are paid out through dividends are taxed again?

Pam Olson: The second one. The company pays tax on its income then it turns around and distributes what’s left to shareholders, who pay tax on it again. So we’ve got a double level of tax. The statutory corporate rate is 35 percent and the individual rate can go as high as 38.6 percent. So if you put that combination together, it’s an effective rate of up to 60 percent on the corporate income.

MSNBC-Will Femia: We are also unclear about just how many people hold dividend-bearing stocks. The accusation is that it’s just a few rich people, but then there’s the 35 million people number floating around. How many people pay dividend tax every year who would benefit from this cut?

Pam Olson: According to a study done recently by the Securities Industry Association and/or the Investment Company Institute, a little over 50 percent of American households own equities. So the ownership of stock is quite widespread.

Question from Allen Phillips, Southport, NC: The heavy tax burden on the middle class often causes me to wonder why I work so hard only to have the government take so much of my earnings. Why does the plan not include large spending cuts accompanied by tax reductions that would take some of the weight off of the middle class?

Pam Olson: The spending side is actually out of my area of responsibility, I’ve got responsibility for the tax side. But on the tax side I think it would be good to have good understanding of the elements of President Bush’s plan because much of President Bush’s plan is going to go to reducing the tax burden on middle-income taxpayers. We’ll just run through three features of President Bush’s tax plan.

First, we’ve got a 10 percent bracket, which is going to increase in size. So what that means is that an additional amount of the workers’ income is going to be subject to tax at 10 percent. Then we’ve got a child credit and we’ve got a widening of the 15 percent bracket for married couples and we’ve got an increase in the standard deduction for married couples. And both of those are going to be targeted at the middle class as well.

The child credit is currently $600 per child. That’s going to increase to $1,000 per child. The standard deduction currently for a married couple is not quite twice what it is for a single. Under the President’s proposal, the standard deduction for a married couple would be exactly doubled.

Same with the 15 percent bracket. Right now the 15 percent bracket for a married couple is not twice what it is for a single. With the President’s proposal, the 15 percent bracket would be doubled for a married couple So there’s a good deal of tax relief in this package that is targeted at the middle class.

MSNBC-Will Femia: Details on this in this article: Bush unveils economic stimulus plan.

Question from Eric Klos, Clifton, Virginia: Please comment on the immediate $300 tax credit in the Democratic proposal. It seems that was just what the doctor ordered last year and I suspect is why any recession was not deep and long. Is it possible that will be part of a final package?

MSNBC-Will Femia: Isn’t that what you did last year??

Pam Olson: That’s what we did in 2001, that’s correct. What we did was to accelerate the 10 percent bracket by sending out checks for the amount of the additional tax savings that individuals would get when that 10 percent bracket was fully effective.

And actually the President does have a proposal with respect to the child credit to make it an advanceable credit for 2003. So his proposal is that we take that additional $400 increase in child credit and put that into checks to send it out to individual just as we did in 2001.

MSNBC-Will Femia: Did the $300 credit not work last time and that’s why we’re trying something new?

Pam Olson: I think most people have concluded that the $300/$600 rebate checks did have a positive effect on the economy — that they did help in part to shore up consumer spending at that time for some families and individuals used it to pay down debt, but that similarly improves their ability to spend on a going forward basis. So I think the general view is that the checks in 2001 did have a positive effect.

At the same time, of course, we had kicking in the reductions in tax rates that were rolled out in withholding tax table so that employers were able to implement those changes as quickly as possible. So that meant that on a monthly, weekly, however frequently employees get paid basis, they were seeing additional cash in their paychecks because the amount of withholding taxes went down.

So we had those two things operating together in 2001. President Bush would like to see the same thing happen again in 2003. He’d like to see the child credit sent out on an advanceable basis and then he’d like to see us get the withholding tables out as quickly as possible so that employers can make use of the reduced withholding rates that would be reflected in those tables.

Question from Jim, Lenexa, KS: The MSNBC story says that the Bush proposal will “provide quick tax relief for married couples and offer a $400-per-child increase in the tax credit for families with children.” Presumably ‘quick’ in this instance means when we file our 2003 taxes — or about a year from now. Is this the case?

MSNBC-Will Femia: and can you talk about how the timing of the plan works generally?

Pam Olson: Sure. Obviously we need Congress to act and we hope they act very quickly. In 2001 they acted fairly quickly and we had the legislation enacted in late May so we were able to begin in late May putting in place the procedures to get the checks sent out to individuals. And we were able to put the withholding tables out for employers.

We would expect to do the same thing here. I believe that Congress is eager to act on a growth/jobs package along the lines of what the President has proposed and so we will be ready here at Treasury to adjust the withholding tables as soon as Congress has completed action and we know what the final terms are. And we’ll also be ready, if this is what Congress ultimately passes, to send out checks for the increase in the child credit. So that would mean that a good deal of this could be delivered during 2003, and indeed fairly early in 2003.

MSNBC-Will Femia: Is there any such thing as quicker than that? Or is that as short term as it gets?

Pam Olson: It depends on how fast Congress acts. Suppose that they were to pass legislation in March, we could have those withholding tables out in March and employers could crank that into paychecks probably as quickly as April.

MSNBC-Will Femia: How are the longer-term triggers figured? Is that based on what we can afford as time goes on?

Pam Olson: What the president has proposed in his growth and jobs package is the acceleration of rate cuts that were already approved by Congress on a bipartisan basis in 2001 -just that the effective date for those rate cuts were deferred.

So what the president has proposed is moving the effective date up to 2003. As he said yesterday, if those rates are good for 2004 and 2006 and beyond, they’re good now, we need to act now to put the additional cash in workers’ pockets so they can spend the money now.

The rest of the package is expensing for small business. We really do believe that small businesses could use a boost. So the small business expensing provision would allow them to write off up to $75,000 of the cost of equipment that they purchased to use in the business. This would be a tremendous boon to them because it means that they won’t have to pay tax on the amount that they have spent to acquire this equipment. That leaves additional cash in their pocket that they can use to hire additional workers, buy other equipment, pay workers more…

The other component is, of course, the elimination of the double tax on dividends. We think the elimination of the double tax on dividends is clearly the right policy decision. We have so many distortions caused by the fact that we have a double tax on dividends, and it’s really time for us to end that.

Question from Bill Altiv, Springfield, MO.: Pass both and no one can complain, what’s anther $136 billion?

Question from Moving_On: What is President Bush’s view of deficits?

MSNBC-Will Femia: How did you figure the price tag on this? What would have been too much?

Pam Olson: What the president did was to look at various options that would be good options for growing the economy, restoring confidence in the markets, and encouraging people to go about their lives and spend on things that they need for their family as they have in the past.

He had a range of options to look at, and what he did was go through and pick the ones he believed would have the best long term positive effect on the economy. So that’s how the package was put together.

MSNBC-Will Femia: Was this plan considered with the cost of war in mind or could budget deficits be greater than forecast if we go to war?

Pam Olson: The budget will be out early next month and that will have details on other questions about the budget. Obviously the possibility of war is something that folks are thinking about and factoring into their thinking. What the president concluded with this package is that this is the best package to ensure the long term health of the economy and be sure it gets back on its feet and growing strongly again.

Question from Tod Loebel, Hadley, Ma: I don’t own any stocks outside of a retirement program, so I don’t pay that “double taxation” the president is concerned about. However, I am a working stiff, and I note that I pay a payroll tax and then an income tax on the same income. How about my double taxation? There is no payroll tax on dividends — they escape that one.

MSNBC-Will Femia: There are a lot of questions from people about a payroll tax.

Pam Olson: The payroll tax is what we use to pay for Social Security and it is the amount that was calculated a number of years ago as the appropriate amount to be paid by workers and employers to ensure the availability of social security retirement benefits. It is something that is separate from the income tax and its a separate levy imposed on the worker’s income.

MSNBC-Will Femia: Is it untouchable?

Pam Olson: Yes, it generally is. If you reduce the Social Security tax, you would have to take some other step to put more money in the Social Security trust fund. Many low income workers, I would note, do qualify for the earned income tax credit, in some cases the additional child credit, both of which operate to refund to those workers the Social Security taxes that they’ve paid — in some cases more than once.

Question from Bill Sharp, Sikeston, Missouri: What are the chances that the final tax plan that makes it through Congress would include a heavier weighting to the lower or middle class taxpayer and self employed? For example, what would the net impact be should the top tax brackets have a reduction of 1 percent or so less, but allow the payroll taxes (SS and Medicare taxes) to be applied as a credit against the income taxes for the first so many dollars. This would give relatively more dollars to the lower earners who would most definitely spend those dollars. It would give more bang to the economy and be more politically acceptable to all.

MSNBC-Will Femia: The philosophy of this plan concentrates more on investment for growth than consumers for growth, right?

Pam Olson: That’s a good way of summarizing it. What the president wants to do is create the right conditions for the economy to grow. So that means we need to get our policies straightened around in the right place, we need to get the incentives right and when the economy grows, that’s how everybody benefits because that creates jobs and opportunities and higher wages for everybody.

MSNBC-Will Femia: Do you have any idea what changes will be made in Congress? Do you consult with them during this whole process or do they have their own tax people?

Pam Olson: We work very closely with the folks in Congress as they craft their package. This is the President’s proposal and he’d obviously like to see his proposal enacted. But Congress always works its will and we look forward to working with Congress on moving an economic growth and jobs package.

MSNBC-Will Femia: Do you have any insight into what kind of compromises you’ll be asked to make?

Pam Olson: I think the package the president has put on the table is a very balanced package. If you look at the distribution of the tax cuts across the income levels, the highest cuts percentage-wise will go to those in lower income tax brackets. So I think what the president has proposed is a very balanced package, and a package that is steady. It stays the course, it provides a foundation for families to plan, and for businesses to plan for the long term. Those are the things that were factored in.

I think that there are a number of things in the president’s plan that people of whatever persuasion ought to like. The child credit, the expansion of the low-income bracket, the marriage penalty relief… I think those things ought to appeal to everyone and that’s a substantial part of the president’s proposals.

We have seen several different ideas floated by different folks on The Hill, I believe all of them Democrats. We haven’t had any negative reaction from our Republican colleagues on the Hill. We look forward to working with both the Republican and Democrats on the Hill in crafting a final economic growth and jobs package.

Question from »_Impulse: Ms. Olsen, may I ask, wouldn’t it be better to simply eliminate the tax President Clinton imposed on Social Security benefits?

Pam Olson: That was one of the options that we did look at as the president was putting together the package. A lot of people would like to see the ’93 Tax Act completely rolled back.

MSNBC-Will Femia: I wonder if you could share some insight into the process that goes into coming up with a plan like this. Do you start with every possible solution and then eliminate? Or does everyone sit around and talk about what they don’t like about the current system? Where do the ideas come from?

Pam Olson: Well, in the Office of Tax Policy here at Treasury we have people whose full time job is thinking about the tax system and the economy and how the two fit together and how to make it work better. So we spend a lot of time trying to make sure that we understand how the various tax rules impact business, impact families, impact decision making. So we always have some ideas about whether things are working right or whether things could use some improvement.

Then we all have very definite ideas based on the economic understanding of the way the that tax system functions, of the kind of proposals that are most likely to result in economic growth and job creation. So we go through all of the different ideas and the different possibilities that are consistent with eliminating problems in the system and with long term growth for the economy and figure out which of them are most likely to yield the most benefit for the economy and that’s how we put together the options and the president put together his package.

Question from Mai: Why is there such a gap in the percentage paid into Social Security? 7.5 percent, then 0..... its tough on the self employed... 15 percent for the little guy, none for the more successful.

Pam Olson: We’ve got 7.65 percent imposed on the worker and another 7.65 percent that’s imposed on the employer. So that second part, that 7.65 percent that’s imposed on the employer is something that workers are often completely unaware of, but it does yield that 15.3 percent in total that the self-employed worker receives.

Question from AndyDem: Isn’t President Bush’s plan again too reliant on the honesty of investors? I heard criticism of the dividends portion, with critics saying companies will just hold onto the money instead of reinvesting it.

MSNBC-Will Femia: Obviously you can’t account for criminality, but how much discussion was there of closing those off-shore tax loopholes we hear about? Things that aren’t criminal but are “loopholes.”

Pam Olson: This could have a very interesting and positive impact on corporate behavior, because it takes some of the premium off reducing corporate taxes. To the extent that the corporate income has been taxed, that’s the extent to which the company will be able to pass along excludable dividends to shareholders — or retain the earnings and reinvest them on behalf of shareholders with the shareholders getting credit for the tax that was paid by the company.

So there is going to be little reduced incentive for the company to shelter its income. In addition to that, if the company chooses to retain earnings and reinvest them to pass the credit from the taxes paid on to shareholders, the shareholders will get that information on a 1099 every year, and it’s going to make the shareholders more aware of the amount of cash that’s being retained by the company and reinvested and perhaps to give shareholders a better window to call to account whether or not the company is doing a good job of reinvesting the earnings that its retaining. That’s information that’s already available in a company’s annual report. This might be a very interesting window for investors.

MSNBC-Will Femia: How much did the change of Treasury Secretary impact the drafting of this plan?

MSNBC-Will Femia: Did you not start until Snow was in?

Pam Olson: Mr. Snow has not been confirmed yet, he has to go through the Senate confirmation process. So he won’t be on board until later this month. We’ve been working on these ideas since last summer and some of them since before last summer.

Question from Susan Rynas, Duarte, CA: I think Bush’s plan is good one. It gets rid of the unfair taxes such as the double taxation of dividends, death tax, and the marriage penalty. I think coming out against it before he had a chance to present it seemed to me to be very childish.

MSNBC-Will Femia: Do you see validity in some of the objections to this plan? Or are they mostly petty partisan attacks?

Pam Olson: I guess I fall in the category of thinking they’re mostly petty partisan attacks. I the package that the president has put together is a very balanced package. It provides benefits to people all the way across the income spectrum. It does, as the person noted, eliminate some taxes that have never made any sense. The death tax is of course something that the president proposed the repeal of when he ran for president and Congress enacted it as part of the 2001 tax act. This would eliminate the double tax on dividends. It’s also got marriage penalty relief.

So I do think that this proposal goes a long way to putting together a tax system that is consistent with American values.

MSNBC-Will Femia: Thank you very much, Ms. Olson, for joining us.

Pam Olson: Thanks for having me!

MSNBC-Will Femia: For more information, read this article outlining the plan, and politics reporter Tom Curry’s analysis of how the Bush plan differs from proposals put forth by Democrats.