Bush Offers Tax Cuts to Spur Growth

By Maura Reynolds

Jan. 8, 2003 12 AM PT

Times Staff Writer

CHICAGO —

President Bush formally unveiled a plan Tuesday designed to spur America’s sluggish economy through bigger, faster tax cuts--an approach he said will increase consumer spending and reinvigorate the stock market. But critics said it will mostly benefit the rich and help lower- and middle-income Americans little or not at all.

The plan will cost the federal government $674 billion over 10 years, more than half of it by eliminating the tax on cash dividends companies pay to shareholders, according to White House estimates.

The proposal would also accelerate all income tax rate cuts in Bush’s 2001 tax plan -- including changes in tax brackets, the so-called marriage penalty and child credits -- so they become effective this year. Under existing law, the cuts would have come into force gradually until 2010.

The president also proposed a new tax incentive for small business and the creation of “reemployment accounts” to help the unemployed get training and other services needed to find jobs.

“The jobs and growth proposals I’ve outlined today are a focused plan to encourage consumer spending, to promote small-business growth, to boost confidence in our markets and to give critical help to unemployed citizens,” Bush told a luncheon of 2,200 business executives hosted by the Economic Club of Chicago.

The stimulus plan follows months of White House worry about the economy, which was in recession when Bush took office in January 2001, and has since shown only anemic signs of recovery. Bush and his staff, mindful of the 2004 presidential election and how a faltering economy damaged his father’s reelection bid in 1992, are eager to jump-start growth.

The stimulus plan’s focus on tax cuts has been especially controversial, even within the administration, because the cuts are expected to increase the federal deficit -- by $102 billion this year alone, according to White House officials.

With an eye toward Democrats’ efforts to dismiss its plan as a sop to the rich, the administration had originally considered excluding the wealthiest Americans from the tax-cut acceleration. But it ultimately decided to make the cuts across the board, administration officials said.

“The president does not believe in punishing people because they are successful,” White House Press Secretary Ari Fleischer said.

Also dropped from the plan at the last minute was a proposed $10-billion aid package for the states to create jobs. State governments across the nation face severe budget crises, and the president’s plan will have the indirect effect of cutting into state revenue as well.

A senior administration official briefing reporters after the speech said the president recognizes that the plan will increase the federal deficit in the short run. His hope is that in the long run, economic growth will make up the lost tax revenue.

“Fiscal considerations have not gone out the window,” the official insisted.

Bush’s plan has been assailed from the start by Democrats. Their criticism broadened Tuesday to question cutting taxes for the rich when the nation is on the brink of a costly war they say will be fought by the non-rich.

“Never in a time of war have we reduced the tax burden on the most privileged,” said Rep. Charles B. Rangel (D-N.Y.). “At the same time, we expect the middle-income to shoulder a larger burden and we send a disproportionate number of lower- and middle-class kids to fight a war. If this is class warfare, I ask, who started it?”

The Bush plan does include some elements that are attractive to Democrats, including the increase in the per-child tax credit, acceleration of tax cuts for married couples and small- business tax breaks. But Democrats complain that such provisions are too small a part of the Bush package -- just 24% over the 10-year period.

Congressional Republicans welcomed Bush’s proposal and promised quick action. But Senate Finance Chairman Charles E. Grassley of Iowa said it would probably not clear Congress before April, when a war with Iraq might be underway. Passage in the Senate is particularly problematic because it usually takes support from 60 senators -- not a simple majority of 51 -- to prevent a filibuster and pass a bill.

With Democrats criticizing Bush’s plan for its effect on the deficit, Republicans -- who for years pushed for a balanced budget -- are in the unusual position of arguing that deficits do not matter.

“What we need to do for an economic stimulus package is not look at what the cost is but what the impact will be on the economy,” said Sen. Rick Santorum (R-Pa.).

Bush took pains to insist that the proposed tax cuts would benefit a broad swath of Americans. The White House contends that it will mean tax cuts averaging $1,083 for 92 million Americans this year. In particular, Bush repeated Tuesday that 50% of dividend payouts go to senior citizens who “often rely on those checks for a steady source of income in their retirement.”

Critics take issue with that assertion. According to an analysis by the generally liberal Center on Budget and Policy Priorities, nearly three-quarters of the tax cut would go to seniors with incomes above $75,000 -- about 19% of all elderly citizens. Nearly 40% of the cuts would go to just 2.5% of the elderly -- those with incomes above $200,000. The poorest senior citizens, those with incomes below $50,000, would get only 6% of the tax cut benefits.

“By citing a statistic showing that a large share of the benefits from this proposal would go to the elderly, some proponents of this tax cut appear to be trying to foster the impression that it would benefit the average or typical elderly person. This is not the case,” wrote Joel Friedman and Richard Greenstein, authors of the report. “Most elderly have fairly low incomes and would receive little or nothing from this tax cut.”

Administration officials acknowledged the wealthy would benefit more from the elimination of the dividend tax, but said that overall, while the wealthiest Americans will be getting the biggest tax cuts under the plan, their tax burden as a percentage of income will increase.

The president said that the most important aspect of his plan was “strengthening investor confidence. By ending double taxation of dividends, we will increase the return on investing, which will draw more money into the markets to provide capital to build factories, to buy equipment, [to] hire more people,” Bush said. By “double taxation,” Bush was referring to the taxes paid by companies on their net earnings, and those paid by shareholders on dividends paid out of those earnings.

But some economists consider the expected impact on stock prices too modest and indirect to stimulate spending by consumers, who account for two-thirds of the economy. And they question the wisdom of using tax policy to stimulate stock prices.

White House economic advisor R. Glenn Hubbard calculated that by encouraging investment, the elimination of the tax on dividends will add 0.4% to the gross domestic product this year -- a comparatively modest amount -- and an average of 0.2% annually over five years.

Other features of the plan:

* Reemployment accounts. The federal government will provide up to $3,000 to help long-term unemployed workers find new employment. The funds, to be administered by the states according to local conditions, can be used by the jobless for costs associated with finding new work -- training, child care, transportation and relocation. Any unused portion will be given to the worker as a bonus after he or she finds work.

* A small-business tax credit. The plan would raise to $75,000 from $25,000 the amount of capital expenses a small business can write off. The president said the goal is to increase capital investments, which will increase productivity and create jobs.

* An increased child tax credit. The proposal would raise the annual child tax credit to $1,000, up from $600. The additional $400 would be sent out to eligible families in a check by the Treasury Department. Families with incomes over $100,000 would not be eligible.

* Reduction of the so-called marriage penalty. The standard deduction for married filers would be immediately raised to twice that for single filers.

* An expanded 10% tax bracket. The lowest current tax bracket of 10% would be expanded immediately to benefit people with higher income levels who are now taxed at a 15% rate.

Times staff writers Janet Hook and Peter G. Gosselin in Washington contributed to this report.

At a glance

President Bush’s plan would cost the Treasury about

$674 billion over the next decade. Some highlights:

Child tax credit: An immediate increase in the credit to $1,000 from $600.

“Marriage penalty”: Alleviating it this year, rather than later.

Accelerated tax rate cuts: Reducing the 27% bracket to 25%, the 30% to 28%, the 35% to 33% and the 38.6% to 35%.

Tax-free stock dividends: Abolishing the tax that investors pay on dividends.

Sources: White House, Treasury Department

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Costs this year and later

The cost (in billions) of various proposals in President Bush’s economic stimulus plan for calendar year 2003 and 10-year totals: