CCH Provides Analysis Of Bush Stimulus Plan
January 8, 2003) – President Bush’s plan to stimulate the economy
through new and accelerated tax breaks will benefit almost everyone
who pays taxes, although some groups will see much more effect than
others, according to CCH INCORPORATED (CCH), a leading provider of
tax law information and software. The plan is designed to have both
direct and predictable effects – lowering the taxes due – as well
as indirect effects, such as bolstering stock prices and increasing
business spending, which are more difficult to verify in advance.
The Bush plan
is multifaceted. For individuals, it calls for eliminating taxes on
shareholder dividends, increasing the child credit from $600 to $1,000,
expanding the bottom, 10-percent bracket, lowering tax rates for those
brackets above 15 percent and giving special relief to married taxpayers
through an expanded 15-percent bracket and an increased standard deduction.
For business, it offers an increase in the amount of equipment purchases
that can be immediately written off, rather than depreciated, from
$25,000 to $75,000.
Bush also is proposing
to extend unemployment benefits for an additional 13 weeks and to
set up Personal Re-Employment Accounts of up to $3,000 that unemployed
workers could draw on to pay for job training, child care, transportation
and other costs associated with finding a new job.
Dividends a Major
Component of Plan
A major component
of Bush’s plan is the elimination of income tax on shareholder dividends.
Unlike many other parts of the plan dealing with individual taxes,
this proposal was not touched on in the major tax bill that became
law in 2001. A major question about this provision is how much benefit
it would provide to various income groups.
At the low end
of the income scale, relatively few tax returns report any dividends
in the first place. On year 2000 returns, only one taxpayer in seven
with income under $20,000 reported any dividends, and only 20 percent
of returns with income of less than $75,000 showed any dividends.
By contrast, 87 percent of returns with $200,000 or more in income
reported dividends. Although many people hold stocks in their 401(k)
and other retirement accounts, the dividends from them are not taxed
now and therefore would not be affected by the plan.
But those individuals
who do receive dividends report significant amounts, given their income
levels. Taxpayers with less than $20,000 in income who have dividends
report an average dividend income of $1,385, while those with incomes
between $50,000 and $75,000 who have dividend income report an average
of $2,914. But taxpayers with little income already pay little in
tax on their dividend income, and would pay even less under the proposed
rate reductions, so their direct savings from the elimination of dividend
taxation will be relatively modest.
"It is undoubtedly
those with tens of thousands of dollars in dividend income – who,
not surprisingly, tend to have a lot of income, period – who will
benefit the most, and most directly, from this element in the Bush
plan," said CCH principal tax analyst Mark Luscombe, JD, LLM,
The total effect
of the elimination of taxes on dividends will undoubtedly extend beyond
its immediate trimming of tax bills, although how great that effect
might be is harder to measure.
are seen as more desirable and stock prices rise, many people would
benefit from seeing their retirement plan balances go up," Luscombe
observed. "In turn, if people felt more secure in their retirement,
they might be more willing to spend money now, which would stimulate
the economy. We also may see people changing their investment strategies,
leaning more toward dividend-paying stocks as a source of income,
especially retirement income."
2001 Tax Law
of the Bush plan will benefit individuals by speeding up provisions
in 2001 tax legislation that were due to take effect between 2004
and 2010. The benefits will be spread around, but high-income taxpayers,
married couples and especially married couples with children who qualify
for the child credit will benefit the most.
An expansion of
the 10-percent bracket will reduce taxes for anyone except someone
filing as head of household who currently has income taxed above 10
percent. There is additional rate relief for those in the 27-percent
and higher brackets.
will see a significant expansion of the amount of income included
in the 15-percent tax bracket as part of the "marriage penalty
relief" in the 2001 tax bill that is being fast-forwarded to
2003. The top end of their 15-percent bracket rises from $47,450 under
current law for 2003 to $56,800 under Bush’s proposal.
An increase in
the child credit from $600 to $1,000 will have an especially large
effect for low- and moderate-income taxpayers, since the credit wipes
out taxes dollar-for-dollar and can even be refundable.
with moderate incomes will find that their federal tax obligation
will shrink to zero, or a very modest amount, once all the provisions
are added together, and a greater number of low-income families should
receive a check, rather than a tax bill," Luscombe observed.
In fact, the Treasury
plans to mail refund checks this summer to parents who would appear
to be eligible to claim the credit on their 2003 taxes, if the plan
passes by late spring, as the administration hopes it will.
Those who fare
less well are single taxpayers without children. Although they, too,
will see their taxes trimmed through rate reductions, the plan has
nothing for them that compares with the dramatic tax-lowering provisions
affecting married couples and families with children.
favoring families are already part of the law, but accelerating the
provisions will make that pro-family bias even more evident,"
The other tax-related
part of the Bush stimulus plan is an increase in the amount that businesses
can "expense," or immediately write off, from $25,000 to
$75,000. This can have a measurable impact on the bottom line for
a small company, but Luscombe believes it will depend on other factors
to have its full effect.
owners generally don’t incur expenses just so they can take a tax
deduction. They are likely to spend only when they’re fairly confident
that the expenditure will lead to more sales and profits. Making it
easier to deduct expenditures for equipment may stimulate the economy,
but a stronger economy may itself be the key to encouraging business
owners to spend," Luscombe said.
Democrats have put forward their own stimulus plan, with a smaller
range of tax provisions and a more limited scope, since almost all
of their proposals would only apply to 2003.
Like Bush, the
Democrats would increase the ability for businesses to write off equipment
expenditures, but to $50,000 rather than $75,000.
the Democrats propose a one-time rebate of taxes for wage-earners.
The rebate would be equal to 10 percent of earned income up to $3,000
for single filers, 10 percent of earned income up to $6,000 for couples.
of up to $300 or $600 could be greater than the cuts in the Bush plan
in some cases, such as for people currently in the 10-percent bracket,"
Luscombe said. "However, by defining the rebate in terms of earned
income, it would not provide any benefit to retirees living on Social
Security, pensions and investments."
Although the President’s
party controls both houses of Congress, passage of his stimulus proposal
may hinge on how concerned lawmakers are about the high costs of the
plan, estimated to cost $670 billion.
tax bill passed with bipartisan support, and much of the President’s
plan simply makes that legislation become fully effective sooner.
But if legislators have to face up to the deficit effects sooner as
well, support may be less enthusiastic," Luscombe said.
on the new proposal, including taxpayer scenarios and how the plan
changes tax brackets and rates can be found at http://www.cch.com/bushtaxplan/.
About CCH INCORPORATED
headquartered in Riverwoods, Ill., was founded in 1913 and has served
four generations of business professionals and their clients. The
company produces more than 700 electronic and print products for the
tax, legal, securities, insurance, human resources, health care and
small business markets. The CCH tax and accounting destination site
can be accessed at tax.cchgroup.com.