President Bush will propose Tuesday to stimulate the economy by eliminating the tax on stock dividends and by cutting taxes this year for nearly 100 million taxpayers, at a cost of some $600 billion to the federal Treasury over 10 years.
Bush’s speech before the Economic Club of Chicago will sound the official opening bell of a debate over economic policy that is expected to dominate Washington domestic policy until summer. The outcome not only will affect the jobs and incomes of ordinary Americans, but also will color political conditions leading into the president’s campaign to win re-election in 2004.
Democrats in the House of Representatives released their own stimulus plan Monday, a $136 billion proposal that would extend unemployment benefits, provide tax rebates of up to $600 per working couple, allow small businesses to write off more expenses and give states extra money for homeland security, Medicaid and highways. They said their proposal would create at least 1 million jobs, and would be fairer and much less expensive than Bush’s program.
Eliminating the dividend taxes that shareholders pay is at the center of the president’s plan. Economists argue that dividends are subject to double taxation, both when the money counts as corporate income and again when it is returned to shareholders as dividends.
“It’s unfair to tax money twice,” Bush said Monday in remarks at a White House Cabinet meeting. “That doesn’t make any sense. That’s unfair. That’s bad public policy.”
The administration says eliminating taxes on dividends–costing the Treasury $300 billion over 10 years–could benefit 35 million investors, nearly one-third of them senior citizens, and boost stock prices by up to 10 percent.
Democrats said Bush’s proposal to eliminate taxes on dividends was particularly skewed toward the wealthiest Americans.
Independent economic analysts said a well-constructed stimulus package could boost economic growth in the second half of 2003 and guard against the risk of a slide back into recession. Analysts said they expected Congress to approve a final compromise that would inject $50 billion to $100 billion into the economy in 2003.
It’s not just the size of any stimulus package that matters, it’s also the makeup. If money from a tax cut is saved instead of spent, it adds little to economic growth. To succeed, stimulus measures need to take effect quickly and to focus on encouraging spending, analysts said.
“We don’t need stimulus in 2011-2012,” said David Wyss, the chief economist at the Standard & Poor’s rating agency in New York. “We need stimulus in 2003-2004.”