Republicans Lukewarm On Bush's Tax Stimulus Plan

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

28 February 2003

With the prospect of a potentially costly war in Iraq, and criticism coming from many quarters, speculation is rife as to how much of President Bush's bold tax cutting plan to stimulate the US economy will actually make it onto the statute book.

The plan has already taken several knocks recently, including a lukewarm response from the highly respected and influential Federal Reserve chairman, Alan Greenspan as well as attracting criticism from a group of Nobel economists. Add also a $300bn gap in the government's finances, and the president's arguments seem to be a little less assured than previously.

One hotly debated aspect of the tax reforms is the abolition of tax on share dividends. Bush would like to see 100% tax-free dividends, with small-cap non dividend paying companies offering a "deemed dividend", allowing the shareholder to pay less capital gains tax when he/she sells the stock. Andy Laperriere, a managing director of the International Strategy and Investment Group predicted on CNN/Money.com "there'll be 100% exclusion for dividends", though probably with the capital gains aspect relaxed. Conversely, Chris Edwards, fiscal policy director of the Cato Institute, a free market think-tank, thinks Bush will only get away with a 50% reduction in dividend tax on its passage through congress.

The plan also doesn't account for the cost of a war in Iraq, the likelihood of which is growing daily. The Pentagon recently estimated this at a figure upwards of $85 billion (assuming only a short campaign is waged). It is also estimated that the cost of rebuilding and peace-keeping operations in Iraq could be anything from $105-$498 billion. However, some argue that this represents only a small percentage of the United States overall GDP, and can be absorbed by the economy quite easily.

In the light of this, whilst it is thought these factors are not enough to completely scupper Bush's plan, it is likely that it will have to pass in a more streamlined form.

However, there are aspects of the tax plan such as those relating to income tax, child tax credits and marriage relief that most agree will become law. The combined effect of these is designed to save the average American family of four at least $1,600 according to the White House's own statement on its website, including a $400 increase in the child credit to $1000 for those earning less than $110,00 per year.

With opposition from the Democrat side of the house expected, the plan has also attracted a mixed response even from within the Republican party, suggesting that it will be impossible for the plan to go through in it's original package. Earlier this week, Senator George Voinovich, an Ohio Republican told the press ''There is some concern about the amount of money, particularly when we are already borrowing so much to run the Government." He advocated the scrapping of the share dividend tax cut, costing $390 billion over the next ten years, in favour of an acceleration of previous tax cuts implemented in 2001.

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