President Bush Proposes Further Tax Cuts

President Bush has proposed a $674 billion stimulus package featuring marginal rate tax cuts and an exclusion from gross income of most dividends. Both provisions would be retroactive to January 1, 2003. The exclusion would apply only to dividends already subject to tax at the corporate level. Under the rate cut proposal, a 28% marginal rate would apply to married persons filing jointly whose income was between $114,650 and $174,700. As recently as 1999, a 36% rate applied to similar filers with income over $140,000.

To prevent the unpopular alternative minimum tax (AMT) from gaining a foothold on even more returns than at present because of lower tax rates, the AMT exemption would be increased by $8,000 for married couples. . . To win the 60 Senate votes required for passage of tax legislation, Mr. Bush may be required to trim the dividend exclusion, a costly component of the plan, from 100% to 50%. . . Notably absent from the plan was a proposal to further reduce the capital gains tax. Even without a further reduction, if income tax reductions occur as proposed, regular income tax rates for most taxpayers would not greatly exceed long-term capital gains rates.

The President’s proposal would also:

¶   Entirely revise the IRC § 179 expense allowance, by (i) increasing the dollar limitation to $75,000 from $25,000; (ii) increasing the investment limitation phaseout to $325,000 from $200,000; and (iii) indexing (i) and (ii) for inflation beginning in 2004. Two aspects of section 179 would not change: First, amounts disallowed by the investment limitation phaseout would not carry forward to future years; and second, amounts disallowed by the taxable income limitation (which limits the expense allowance to taxable income), would  continue to carry forward to future years. Under the new rules, a taxpayer could expense the entire purchase price of an SUV whose gross weight exceeded 6,000 pounds.

¶    Accelerate “marriage penalty” relief by (i) increasing the standard deduction for married filers to exactly twice the standard deduction for single filers; and (ii) expanding the 15 percent tax bracket for married couples to equal exactly twice that of a single taxpayer. Married couples whose income is derived from one spouse would realize a “marriage bonus.”

¶     Increase the child tax credit; and establish “re-employment accounts” offering qualified individuals $3,000 for job retraining.

Democrats have been critical of the Bush plan. Senate Minority Leader Tom Daschle, (S.D.) characterized Mr. Bush as presiding over the “most fiscally irresponsible” administration in history, remarking that the inherited $5.6 trillion surplus had become a $1.7 trillion deficit. House Minority Leader Nancy Pelosi (Calif.), criticized the Bush plan as favoring only the wealthy. Some Democrats have expressed support for (i) reinstatement of EGTRRA taxpayer rebates, at an increased amount of $300 to $600; (ii) increased compensation to states for homeland security spending; and (iii) a temporary suspension of the federal payroll taxes.

The Senate Finance Committee plans to mark up a charitable giving relief bill, which would (i) improve oversight of tax-exempt organizations by expanding penalties for preparers of Form 990; (ii) create a charitable deduction for nonitemizers; (iii) allow penalty-free charitable donations from IRA accounts; (iv) reduce the excise tax on foundations; and (v) raise the contributions cap for C corporations and expand incentives for S corporations to make charitable contributions.

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