Contact Information

• Tax Scenarios Under the Bush Growth and Jobs Plan
• How the President's Plan Changes Tax Brackets, Rates
• CCH Tax Briefing

(RIVERWOODS, ILL., 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.

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, CPA.

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.

"If stocks 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."

The remainder 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.

Married taxpayers 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.

"Many families 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.

"The provisions favoring families are already part of the law, but accelerating the provisions will make that pro-family bias even more evident," Luscombe said.

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.

"Business 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.

Congressional 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.

For individuals, 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.

"These rebates 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.

"The 2001 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.

Additional information 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/.

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.