Economic Stimulus
The Bush administration has proposed an economic stimulus package,
which proposes $726 billion in tax cuts and incentives over a period
of 10 years. The plan has been labeled as too expensive by some Democratic
lawmakers who have offered their own plan, which proposes a modest
$350 billion of tax cuts over the same period. The Bush package is
designed to create economic stimulus by making tax rate reductions
effective now when they can do the most for individuals and the economy.
The plan also calls for the elimination of the double taxation of
dividends by corporations. This provision is intended to eliminate
an unfair tax to investors as well as opening up the capital markets
for needed investment dollars.
The following summarizes some of the key provisions of the Bush
proposal:
1) Acceleration of the 10 percent tax bracket.
2) Acceleration of individual income tax rates.
3) Acceleration of the marriage tax penalty.
4) Acceleration of the child tax credit.
5) Certain relief from AMT.
6) Increased deductions to business for investment in equipment.
7) The exclusion of dividends from individual taxable income.
The following summarizes some of the
key provisions of the Democratic proposal:
1) Tax rebates for individuals from $300 to $600.
2) Increased deductions to business for investment in equipment.
3) Grants to states for Medicaid and infrastructure.
The Bush proposal has been widely accepted by supply-side economists
because it offers an acceleration of tax laws that have already been
agreed upon by Congress. The increase in the expensing of assets
should pave the way for capital investment while the other provisions
provide more cash in the pockets of the individual and business owner.
The Bush administration has lobbied heavily to eliminate the tax
on dividends. The dividend tax provision will cost approximately
$396 billion. The revenue lost to the government would approximate
$30 billion a year. This is immaterial to our $10 trillion economy,
and far less than our $100 trillion asset markets. There would be
no measurable impact on interest rates.
Advisors to the president have indicated that the elimination of
the double taxation on dividends will be the single best stimulus
to bring back growth to the economy. The dividend tax cut would increase
equity values by 10 percent to 20 percent, which essentially adds
$1 trillion to $3 trillion to net worth. It would make capital available
to companies and add more jobs. Additionally, this move will improve
corporate governance in our companies and restore confidence among
investors. The combined tax cuts in the Bush plan would be the largest
stimulus proposed for economic growth and asset markets since the
Reagan plan of 1991.
Although many lawmakers of both parties agree that the double taxation
of dividends should be eliminated, they also agree that this may
not be the right time for such a cut. Uncertainty in the growth of
the economy and the cost of war in IRAQ are concerns that are currently
being debated in both houses. Currently, the U.S. has the highest
tax on capital in the industrialized world. The Congress has an opportunity
to correct a destructive law that minimizes the after tax return
on capital and create a positive stimulus much needed to jump-start
this economy.