Bush Tax Cut Plan Enters New Territory
WASHINGTON — At the center of the economic package President Bush unveils next week will be a tax cut that barely rated mention six months ago and that many experts rank as among the least likely to succeed in giving the economy a quick lift.
It's not that the idea of cutting the tax on stock dividends has never been floated before.
To the contrary, dividends are a favorite target for tax-cut advocates because they are taxed twice -- once when companies make profits and again when a portion of the profits are paid to shareholders -- and that's bad.
It's just that no one has ever proposed using a dividend tax cut, as the administration apparently now intends, in order to give the economy a speedy shot of adrenaline.
"In my memory, it has never been mentioned in the context of an economic stimulus," said UC Berkeley tax economist Alan Auerbach.
"It's just not something you would think about."
And for good reason, according to a variety of critics.
The dividend tax cut will be the centerpiece of a $500-billion to $600-billion package Bush is to unveil Tuesday in Chicago, which is intended to ensure the sluggish economy recovers its snap.
While details have not been disclosed, White House officials have been telegraphing the broad outlines of the proposal.
Democrats have responded by showcasing their chief line of attack: that the benefits of the $30-billion-a-year tax cut would go inordinately to the rich. But that may be the least of the proposal's problems.
As described by administration officials and others, the tax cut would work as a stimulus principally through the stock market.
By pushing up share prices and erasing some of the paper losses of the last three years, it would make people feel wealthier and therefore able to spend more, causing the economy to grow faster.
Citing some of his own work as a former professor, R. Glenn Hubbard, chairman of Bush's Council of Economic Advisors, has estimated that eliminating the personal tax on dividends would drive the market up by as much as 20%.
Analysts say there is a rich irony -- and a big danger -- in the White House picking market-bolstering tax cuts as the centerpiece of its new growth plan.
After all, it was the overheated market's success at eluding the control of the capital's other major economic manager -- the Federal Reserve -- that helped cause many of the problems the new plan is supposed to solve.
