bush plan commentary

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    This from CBNC

    Bush offers his plan -- and takes fire
    President proposes a 10-year, $674 billion plan to spark the economy. He'd speed income tax cuts and eliminate the tax on dividends paid to shareholders. Critics take aim. Markets take a breather. Also: screening for dividend stocks.

    With a clear nod to Wall Street, President Bush made official this afternoon his $674 billion plan to get the nation's economy rolling again, with an end to taxes on dividends paid to investors as its centerpiece.

    ``I will ask members of both parties to work with me to secure our economic future. We cannot be satisfied until every part of our economy is healthy and vigorous,'' Bush said in a speech to the Economic Club of Chicago. Check out your options.
    Record low rates
    could save you a bundle.



    The complex package also:

    Accelerates income-tax cuts now scheduled for next year and 2006

    Lets businesses deduct the cost of new equipment at a faster pace;

    Speeds scheduled relief from the so-called "marriage penalty" that taxes couples at higher rates than single people

    Offers a permanent end to the estate tax, already eased by Bush's 2001 tax cut

    "Our first challenge is to let Americans keep more of their money," Bush said, so they can spend and invest in stocks.

    Critics have already labeled the plan both too costly, at twice what was envisioned just last week, and too small. While the total over 10 years would add to the ballooning federal deficits, they say, it offers only about $100 billion in immediate stimulus, a drop in the bucket of the nation's economy.

    The market response so far today: lackluster, with stocks still not moving far from even. But after a 2%-plus run-up yesterday on the major indexes, and big gains on two of the four trading days of 2003, a little lull seemed to be in order.

    "I hear a lot of doubt about the prospects of the bill's passage, and whether the stimulus provisions are already price into this market," Jennifer Williams of The Griswold Co. told CNBC from the NYSE trading floor.

    But the overall reaction has been positive. Greg Valliere, managing director at Schwab Research Group and today’s Squawk Box co-host noted this role of the stimulus package: it gives the appearance of finally offering some relief for investors after a three-year bear market. Valliere said if the administration “can convince this stock market after who years of indifference that they really care about the market that will help psychologically.”

    In Washington, the response has been mixed. Democrats and maverick Republican Sen. John McCain have taken aim, saying the plan is too skewed in favor of very-high-income Americans who get the lion's share of dividend payments. Democrats have offered their own, much smaller plan.

    But Bush seemed to stress the wide-reaching impact of the spectrum of tax cuts. The White House said 92 million taxpayers would get an average tax cut of $1,083 this year, and as many as 35 million people who get income from dividends could benefit.

    The battle's begun
    MSN Money correspondent Ed Henry notes that the fight began even before the plan was made official:

    Senate Minority Leader Tom Daschle, D-S.D., who stunned colleagues today by abruptly announcing that he will not launch a presidential bid, cited Bush's economic stimulus package as a major reason he wants to stay in the Senate and fight the White House's priorities.

    "The United States Senate has the opportunity to shape the nation's priorities -- not just over the next two years, but for a generation and more," Daschle said. "This afternoon, President Bush is proposing an economic plan that not only continues a failed economic policy that is wrong for the country now, but weakens our ability to meet America's great national challenges for years to come."

    While Daschle's own advisers believed he was likely to jump into the presidential race, the senator said that he does not want to be distracted as Congress begins to debate Bush's economic policies. "I've concluded that at this moment in our history, with so many important decisions to be made about our nation's future, my passion lies here in the Senate serving the people of South Dakota, and fighting for working families all across America."

    Bush administration officials dismissed charges by Daschle and new House Minority Leader Nancy Pelosi, D-Calif., that the Republican package is geared toward helping the rich. Bush officials distributed a memo asserting that the president's plan will benefit "everyone who pays taxes -- especially middle-income Americans."

    "Middle-income families will receive additional relief from accelerated reduction of the marriage penalty, a faster increase in the child tax credit, and immediate implementation of the new, lower 10% tax bracket," said the GOP memo.

    Bush officials also insist that ending double taxation on dividends will help average folks. "About half of all dividend income goes to America's seniors, who often rely on those checks for a steady source of retirement income," said the memo.

    Bonds call the president’s bluff
    The elimination of dividend taxes should drive the bond market nuts. Municipal bonds, favorite haven of tax-free income, could melt from competition with tax-free stock yields. Corporate bonds would have to pay fatter coupons to keep investors interested. And Treasurys, which thrive on fiscal restraint, might simply swoon at the $300 billion price tag.

    But instead of tossing in the towel, bonds have called the president’s bluff. Sure, just about every fixed-income flavor on the good side of junk lost ground in the past few days. But the broad-based losses haven’t been very deep -- particularly among munis, which stand the most to lose from the stimulus plan.

    “Munis have not cratered, not like some trial balloons I’ve seen in my 25 years of doing this,” said Marylin Cohen, president of Envision Capital. “I think the muni market is voting with both hands and both feet that this is not going to happen or it’s not going to happen like people think it’s going to happen.”

    Translation: Bond investors don’t see the president pushing anything like today’s proposal through Congress. The states, already in fiscal straits, have too much to lose if muni yields rise, Cohen said, and muni-bond investors clearly have faith in the states’ powerful Washington lobbies.

    The bond market expects (and can live with) a less extreme reduction in dividend taxes, said Cohen, whose firm manages bond portfolios for high-net-worth individuals. High-quality bonds still yield much more than most high-quality stocks, she pointed out. And traditional income investors won’t quickly abandon their safe harbors without big incentives.


    and this from AAP

    ASSOCIATED PRESS

    CHICAGO, Jan. 7 — President Bush proposed “growth and jobs” plan to stimulate the economy Tuesday, offering a sweeping package of tax cuts and incentives that would eliminate all federal taxes on stock dividends, quick tax relief for married couples and a $400-per-child increase in the tax credit for families with children. Bush said his $674 billion, ten-year plan would reduce taxes for all Americans who pay them, brushing aside Democratic criticism that the plan favored mainly the wealthy.

    “WE CAN PRESERVE the hard won gains our economy has made and advance toward greater prosperity,” he told the Chicago Economic Club.
    The president said the centerpiece of his proposal — the complete elimination of federal income taxes on stock dividends — would help correct an imbalance in the tax code under which dividends are now taxed at a higher rate than profits from stock sales.
    His plan would also accelerate and make permanent tax cuts passed two years ago. “Americans deserve to know their taxes will not be taken away,” he said.
    Bush asked Congress to make the tax cuts effective this year.
    The pricetag on the plan was nearly twice as large as White House advisers had been considering as recently as a week ago, representing a go-for-broke effort by Bush to seize and control both the domestic and political agenda in the run-up to his 2004 re-election campaign.

    Democrats offered their own rival plan and hurled predictable charges that Bush’s plan was a budget-buster that favored his rich supporters.
    Bush addressed some 2,300 business leaders in downtown Chicago, and many of them cheered his economic plan during interviews.
    “The dividend tax cuts are a good idea — people will move more money into the market, because their earnings will be taxed less,” said Jeffrey Katz, chief executive officer of Orbitz.


    The Bush stimulus plan

    Following are proposals from the president’s $674 billion, 10-year economic stimulus package unveiled Jan. 7.
    • Dividends
    • Corporate taxes
    • Tax rates
    • Tax brackets
    • States
    • Other

    The plan calls for the elimination of double taxation on corporate dividends. This is likely to cost as much as $300 billion over 10 years, according to administration sources. Some economists say it could boost stock prices by 10 percent.
    For more information [click here]

    Companies would receive tax breaks and would be eligible for write-offs of up to $75,000 on capital investment, a limit that would be adjusted to inflation.
    For more information [click here]

    The plan would speed up cuts of income tax rates that are currently scheduled to be phased in during 2004 and 2006.
    Tax credits for families with children would increase from $600 to $1,000 this year instead of in 2010. The marriage penalty tax would be decreased this year instead of in 2009.
    The administration says:
    According to the administration:

    92 million taxpayers would receive an average tax cut of $1,083 in 2003

    46 million married couples would receive average tax cuts of $1,716

    34 million families with children will receive average tax cuts of $1,473

    13 million elderly taxpayers would receive a $1,384 tax cut.
    For more information [click here]

    The current 27 percent bracket would be lowered to 25 percent; the 30 percent bracket to 28 percent; the 35 percent bracket to 33 percent; and the top 38.6 bracket to 35 percent. In addition, millions of American workers would be moved to the lowest tax bracket of 10 percent this year instead of in 2008.
    The administration will give states a total of $3.6 billion for job retraining and support for at least 1.2 million unemployed workers. Under this program, jobless workers will have up to $3,000 in Personal Re-employment Accounts to spend on job training, child care, transportation, moving costs and other expenses incurred in looking for a job.

    The administration will also urge Congress to extend emergency jobless benefits, which expired last month.

    John Leonard, the chief of North American equities for UBS Global Asset Management, said Bush’s growth package was “pretty appealing.”

    Eliminating double taxation on dividends “is a smart thing to do so capital can be allocated more wisely,” Leonard said. It would spur the economy by sending more money into the economy, he said.
    Democrats offered a rival tax-cutting plan and said Bush’s favors the rich.
    “The president really is investing $600 billion on an old, old Republican theory of trickle-down economics,” said Rep. George Miller, D-Calif. “We’re saying no. Give it to the people who need it.”
    The Democratic plan would expand unemployment benefits by 26 weeks and give all workers a refundable income tax rebate of up to $300 per person or $600 per working couple. States would get $31 billion for homeland security, highway, Medicaid and unemployment insurance programs.



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    Bush said that under present law, corporations first pay taxes on their profits, and then investors pay taxes again on the same profits when they’re distributed as dividends. Bush asked Congress to end this “double taxation” of dividends.
    “One half of American households own stock, and we have an obligation to make sure American investors are being treated fairly,” he said. However, much of these holdings are in 401(k) or other retirement accounts — and would not be affected by Bush’s proposals, since such dividends are already sheltered from taxes.
    The elimination of taxes on stock dividends is the biggest element of the plan, and is estimated to cost $364 billion over 10 years. Bush’s plan also calls for an immediate acceleration — retroactive to Jan. 1 — of the tax rate cuts that had been scheduled to take effect in 2004 and 2006.
    Bush also proposed immediate relief from the so-called marriage penalty which hits two-earner couples — at a 10-year cost of $58 billion.
    Another key element, one that the administration hoped would mute some of the Democratic criticism, was an increase in the child tax credit, currently at $600, to $1,000 per child. Even families without enough income to pay taxes could get up to $400-per-child rebate checks, under the plan.



    January 7 — Sen. John McCain, R-Ariz., tells ’Today’ host Katie Couric that President Bush’s economic plan should do more to help middle and lower income Americans.



    The administration said that checks reflecting the higher child care credit would be issued this year and it estimated 34 million families would benefit from this element of the president’s plan.
    Overall, the administration said that $102 billion of the cost of the program would occur in 2003 and the rest of the $674 billion total cost would be spread out over the next decade.
    “This is a plan that provides tax relief to the working citizens,” Bush had said Monday. “It’s a plan that is a very fair plan. It’s a plan that recognizes when somebody has more of their own money, they’re likely to spend it, which creates more jobs.”
    Bush’s package would also boost tax relief for small businesses by expanding the amount of equipment purchases they can write off as deductions from the current $25,000 to $75,000 and index future increases to inflation.
 
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