By Ryan J. Donmoyer and Richard Keil
Chicago, (Bloomberg) -- President George W. Bush unveiled a $670 billion plan to end taxes on stock dividends and accelerate income tax cuts, saying it would give the economy ``an immediate boost'' and create 2.1 million jobs.
The 10-year plan would speed up tax reductions set to take effect between now and 2010. It also would boost spending for the jobless, bringing the proposal's total cost to $674 billion.
Bush's third tax-cut proposal in two years would put cash in 92 million Americans' pockets, encourage small businesses to spend and induce investors to buy stocks, the administration said. That would lift share prices and the balances of Americans' retirement accounts, which are languishing after three straight years of declines, officials said.
``The time to deliver these tax rate reductions is now, when they will do the most good,'' Bush said. ``By speeding up the tax cuts we will speed up the pace of economic recovery and job creation.'' Congressional leaders said it will take several months to act on the proposal.
Bush will have to compromise with Democrats to get his plan passed in the Senate, where his Republican party holds 51 of 100 seats.
GDP and Jobs
``I don't know that any of what the president talked about will be passed exactly as he described it -- the Republicans' majority is too thin,'' said Philip Orlando, who helps oversee $6 billion as chief investment officer at Value Line Asset Management. ``There will be some horsetrading, and maybe we'll get legislation by midyear. Then corporate boards will sit down and make some plans.''
Bush is trying to prop up an economy that probably grew at an annual rate of 1.5 percent in the final three months of last year, according to the median estimate of 71 forecasts in a Bloomberg News survey last month. That's about a third the average 4 percent annual growth rate of 1996-2000.
Bush's plan would boost gross domestic product by 0.4 percentage point this year and 1 percent in 2004, Glenn Hubbard, the president's economic adviser, said in an interview.
The proposal would create 2.1 million jobs over three years, according to a forecast by the White House Council of Economic Advisers. That would replace the 1.6 million lost since the economy fell into recession in March 2001 and be about a tenth of the 24.4 million created in the preceding nine years.
Wrong Approach
Senator Jon Corzine, a New Jersey Democrat, said in an interview on Bloomberg television that ending the tax on dividends was the wrong approach because it wouldn't benefit the economy directly and would add to the budget deficit.
``The fact is that only about 50 percent of corporate earnings are taxed and without having a revision of the tax code dealing with tax loopholes, I think it's a bit of a problem,'' Corzine said. ``It is going to undermine, grossly undermine, our fiscal stability over a long period of time.''
House Democrats yesterday proposed a $136 billion alternative to Bush's plan composed of a $300 tax rebate for workers, tax breaks for businesses that buy new equipment, a 26-week extension of unemployment benefits and grants to states for high way and anti-terrorism projects.
It will be ``late March, early April'' before tax cuts can be enacted by Congress, said Charles Grassley, Republican chairman of the Senate Finance Committee, who said he expects to make changes in the bill to win Democratic votes.
Permanent Tax Cuts
``Consumer confidence is what has been driving the economy and to the extent that the Bush tax plan can stimulate consumer confidence, it'll be good,'' said Dieter Zetsche, chief executive officer of DaimlerChrysler AG's Chrysler unit, at the Detroit auto show.
Bush is focusing on the economy at the same time he's preparing for a possible war with Iraq. Tensions with Iraq have weakened the dollar against the euro and the yen, while boosting oil and gold prices, elevating the prospect of a post-war economic slump such as the one that cost his father, George H.W. Bush, the presidency a decade ago.
Bush said the $1.35 trillion in tax cuts enacted in 2001 ``came at just the right time.'' He said he'd continue to press Congress to make those reductions permanent and repeal the estate tax.
Most of Bush's proposed tax changes affect individual taxpayers -- which includes most small businesses. Corporations that own other companies' stock would be treated like individuals and pay no taxes on those dividends.
Small Business Investment
Bush proposed to accelerate reductions in tax rates slated for the next several years and reducing the top individual rate to 35 percent from 38.6 percent. Those changes would be retroactive to Jan. 1, and tax withholding would be reduced immediately to put more cash in workers' pockets. That would save taxpayers $29 billion this year and $64 billion over 10 years, the administration said.
The president proposed tripling the amount that small businesses may write off in one year for equipment purchases to $75,000, saving small companies $2 billion in 2003 and $16 billion over 10 years. He would offset the so-called marriage penalty and accelerate an increase in the per-child tax credit to $1,000 from $600 and refund the $400 difference to taxpayers this year. Together, those changes would cost $35 billion this year and $149 billion over the decade.
Bush also called for extending jobless benefits, which expired for 800,000 Americans in December, and to give states $3.6 billion to pay unemployed workers as much as $3,000 each to aid their search for new jobs.
Tax on Dividends
Last week Bush dismissed Democratic criticism of his proposal as ``class warfare.'' Today the administration emphasized the value of Bush's proposal to ordinary Americans. The tax cut would average $1,083 for each of 92 million U.S. income tax filers, largely due to the acceleration of income tax rate cuts, the increased child-care credit and the end to the marriage penalty.
The centerpiece of Bush's proposal would abolish the tax on dividends, saving $20 billion in taxes this year and costing $364 billion over the decade.
``This is probably the biggest step ever toward having preferential tax on capital income,'' said Joel Slemrod, a University of Michigan Business School professor.
The dollar reached a two-week high against the yen and gained for the first day in three against the euro on speculation Bush's plan would spur the economy. The dollar rose to 120.46 yen at 5:03 p.m. in New York from 119.21 yesterday. The U.S. currency rose to $1.0412 per euro from $1.0456.
Sunoco, Oracle
Stocks were mixed after rising yesterday. The Dow Jones Industrial Average fell 32.98 points, or 0.4 percent, to 8740.59. The Nasdaq Composite Index rose 10.25, or 0.7 percent, to 1431.57.
The S&P 500 Utilities Index had its biggest gain in 11 weeks yesterday as investors bought shares of Dominion Resources Inc. and Public Service Enterprise Group, companies that pay the largest dividends.
Michael McGoldrick, director of taxes for Sunoco Inc., the nation's second-largest refiner, said reducing taxes on dividends might make companies like his more attractive to investors than those that have never paid a dividend. ``It won't change our behavior because we're already paying a dividend,'' he said.
Some companies that don't pay dividends may change their minds if Bush's plan becomes law.
Oracle Chief Financial Officer Jeff Henley, speaking to investors at a Morgan Stanley conference in Scottsdale, Arizona, said the database-software maker would consider paying dividends rather than doing stock buybacks, because the tax advantages of repurchasing programs would vanish.
Schwab's Advice
Bush declared an interest in abolishing the tax on dividends after the idea was suggested by Charles Schwab, founder of the biggest discount brokerage in America, during an economic summit the president convened last August in Waco, Texas. Schwab complained that it was unfair for corporations to pay tax on their income and then have individuals taxed on the dividends that companies pay.
Schwab yesterday said he was ``very pleased and highly supportive'' of Bush's proposal. ``It's a well-conceived and extremely important step in restoring investor confidence and participation in the stock markets,'' he said.
The proposal would be a boon to people who earn between $200,000 and $500,000, who receive an average of $10,848 in dividends, according to Internal Revenue Service figures. Those with incomes over $10 million receive an average of $862,542 in dividends, the tax agency said. About a quarter of Americans earning under $50,000 had taxable dividends, which totaled an average of less than $604.
Bush would have saved $17,000 on $43,805 in dividends he received in 2001, had there been no dividends tax that year, according to a Bloomberg News analysis of the president's tax returns. Vice President Dick Cheney would have saved about $107,000 on $278,103 in dividends, the Bloomberg News analysis of his returns showed.