Bush Aides Rethink Politics of Tax Cuts
Lower Levy on Dividends Gains Favor Over Faster Upper-
URL:http://www.washingtonpost.com/wp-dyn/articles/A45596-2002Dec27.html
By Dana Milbank
Washington Post Staff Writer
Saturday, December 28, 2002; Page A04
CRAWFORD, Tex., Dec. 27 -- White House officials are rethinking a plan to accelerate last year's tax cut for upper-income taxpayers, people familiar with the deliberations said today.
Aides to President Bush had favored a plan to accelerate by a year cuts in income tax rates scheduled to take effect in 2004. But Bush's political advisers, concerned that Democrats will use a class-warfare argument to fight an accelerated reduction in the top rate, have suggested dropping that plan, instead emphasizing a cut in taxes on stock dividends.
When Congress returns next month, the White House is expected to propose a $300 billion economic stimulus package that includes cuts in dividend taxation, the accelerated income tax cuts, and more generous incentives for business investment.
The Wall Street Journal reported today that the administration is "likely" to drop the idea of accelerating the cut in the top rate, which is 38.6 percent, for incomes over $311,950. Here in Crawford, where Bush is taking a holiday vacation, spokesman Scott McClellan said the White House has not reached a decision on the ingredients in the stimulus package.
But while Bush's economic advisers have argued that the top tax rate reduction is an important economic stimulus, political advisers have argued that it may be more fruitful to put Bush's clout behind a new form of tax cuts such as dividend tax cuts.
Economist Daniel J. Mitchell of the conservative Heritage Foundation said he thinks Bush's political advisers are worried that Democrats will portray the Bush as favoring the well off. "There is a general concern that you should get the most bang for the buck if you're going to engage the class warfare criticism," he said, "and their thinking is we're already getting the rate cuts if we wait a year, so why not go for dividend tax cuts?"
The willingness to drop the expedited rate cut for the wealthiest taxpayers as part of the stimulus package aggravates some economic conservatives. "There will be a very negative reaction from free-market conservatives if rates are cut but not the highest rate," said Stephen Moore, who leads the anti-tax Club for Growth. Without the top-rate cut, "I don't think it would have any stimulative effect," he added. "That would be a surrender to class warfare."
The dividend cut, Moore agreed, "has become the centerpiece" of Bush's stimulus plan, which he said is also likely to include some form of accelerated income tax cuts and business tax breaks in the form of accelerated depreciation schedules. There has also been some discussion of a temporary or permanent cut in payroll taxes. But the details of the components of the stimulus plan are yet to be finalized.
Democrats are expected to counter Bush's tax cut package with a stimulus plan that includes more government spending. Sen. Max Baucus (D-Mont.), outgoing chairman of the Senate Finance Committee, proposed a $160 billion package that includes grants to states, a one-time income tax cut, a business investment tax break and funds for highway construction.
As the economy continues to show little evidence that it is recovering, both parties have been eager to demonstrate their concern. Bush has joined Democrats in calling for an extension of unemployment benefits when Congress returns. Businesses also have argued that a cut in dividend taxes would boost ailing stock markets. Dividends are taxed both as corporate income and as distributions to shareholders, leading businesses to complain of double taxation.
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