Bush Wants To Abolish Dividend Taxes

by Mike Godfrey, Tax-News.com, New York

08 January 2003

In the long-expected economic stimulus package announced yesterday, US President George Bush proposed additional tax cuts amounting to $670 billion over ten years. The President said: 'The role of government is not to manage or control the economy ... but to remove obstacles standing in the way."

Centerpiece of the package is a plan to eliminate taxes on dividend income, which would cost $364 billion over 10 years. Many economists have argued that the double taxation of dividends has distorted capital markets, leading corporations to fund themselves by debt. Federal Reserve Chairman Alan Greenspan said last year that this led investors to focus on earnings rather than dividends. "By ending this investment penalty, we will strengthen investor confidence," the president said yesterday. However, his speech left unclear the extent to which the tax cut would apply to foreign investors.

The other main component of the package is an acceleration of income tax cuts due to take effect in 2004 and 2006, which will now be backdated to January 1, providing tax relief for married couples and families with children, as well as bigger incentives for small businesses investing in equipment and aid for the unemployed. The White House said 92m taxpayers would enjoy an average tax cut of $1,083 this year.

In recent days Mr. Bush is said to have nearly doubled the size of the package - but missing was any significant help for cash-strapped states, which had been expecting help with budget deficits totalling tens of billions of dollars. The President had been planning a $10 billion bail-out for the states, but he cut most of this at the last moment, announcing assistance of only $3.6 billion to fund "personal re-employment accounts" designed to give unemployed workers as much as $3,000 for job training, child care, transportation and other expenses involved in finding a new job.

Congressional prospects for the new package are mixed. Although Republicans have majorities in both houses of Congress, their slim 2-vote margin in the Senate is insufficient to over-ride an opposition filibuster, so that Democratic objections to measures which are seen to favour the better-off will have to be taken into account.

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