Time for Inspiration, Not Desperation - Bush's Ecomonic Plan

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Published by Eva Rosenberg, MBA, EA

Time for Inspiration, Not Desperation
Bush's Ecomonic Plan
- Just One TaxMama's Observations -
For the full details of the plan and links to various analysts, explanations, interpretations, etc., the Wall Street Journal has a summary page that is updated as news comes in.

[If you don't have a subscription, you can get one cheaply here]

Here is an online summary of Bush's Tax Stimulus Package in the Wall Street Journal:

____________________

While I won't cover the whole Package, let me just touch on some of the tax issues that will affect you.

» DIVIDENDS

First, let's go ahead and talk about the dividends we keep hearing about, shall we?

President Bush said something the other day that totally floored me. It's the first really smart thing I've heard him say.

Bush said that we really should eliminate the taxes on dividends entirely because it was double taxation, in the first place. Corporations already pay tax on that income.

Amazing. And true.

Regardless of who benefits, or doesn't, this is one tax that really should be eliminated. I have always been surprised that there has never been a legal challenge against it as double taxation.

Who does benefit? After all, you keep hearing that the rich are the only ones who this helps. Not true.

Many senior citizens have their savings in stock portfolios. Nothing fancy, but, often in utilities and other stocks that pay a steady dividend. They live on this money, which usually stay steady, regardless of the ups and downs of the stock prices. This tax cut would be a big gift to seniors on fixed incomes.

As to the rest of us? Most working people today, DO have stock portfolios. That's why the market was so active in the 90's. But, much of those securities are held in tax-free retirement accounts, like IRAs, KEOGHs, SEP-IRAs, SIMPLEs, 401(k)'s and the civil service equivalents. They get no benefit at all from this cut.

Corporations own stock in other corporations, Their taxes would also be cut. Does that mean they would use those additional funds to increase their dividends? If they do, then all shareholders benefit, even those with tax-free accounts. If they spend it on new employees, instead, well that means more jobs. If they simply pocket it as executive raises, that would be socially irresponsible and their shareholder should rise up in protest.

And the wealthy. Yes, the wealthy would benefit. But, I'd hate to see this removed from the bill just because the wealthy would get value from it. It's simply double taxation in the first place.

» MARRIAGE PENALTY

Speeding up the provisions of the original 2001 tax cut would really make a big difference to couples. (See TaxMama's Highlights of the Tax Relief Act). While the 2001 Tax R.E.L.I.E.F. Act didn't remove all the inequities the tax code had with respect to couples, it did, ultimately, bring into balance things like:

Standard Deduction -
In 2006, couples' standard deduction rises to 174% of that applied to a single filer. (That means couples get 26% less of a deduction than if they were two single people filing their own returns - cost to couples of about $100.)

The 15% tax bracket is increased to 180% of that applied to single filers. That means, couples still start paying the 26% tax rate on 20% more income than single people do.(Taxes still cost about $225 more per couple, after the increase to 180%.)

So while married couples will get some benefit, they will still be shortchanged by the simple math of the system that was once developed by Congressmen who believed that two could live as cheaply as one.

» CHILD CARE CREDIT

That would increase to $700. That's a $100 increase over what they had originally scheduled.

» 10% TAX BRACKET

"Immediate implementation of the new, lower 10 percent tax bracket."

This puzzles me. Huh? We already have one. That was where that whole crazy rebate mess started - giving people their refunds from that tax bracket a few months early.

So, what, they'll increase the 10% bracket by a whole $1,000 per person? Well, goodness, that's worth 50 bucks.

» INCREASING THE EQUIPMENT EXPENSING LIMITS

Bush proposes an increase in the expensing limits from $25,000 to $75,000. That means some pretty hefty immediate deductions. But for whom?

Certain SUVs or autos that weigh over 6,000 pounds
Manufacturing companies whose equipment is expensive
Rich people

Let's face it, the average small business person doesn't even spend $25,000 on equipment in one year. In my uneducated opinion, this should benefit less than 5% of small businesses.

Just think a moment, when was the last time you spend $25,000, unless it was a car? And to be able to spend $75K and take a deduction?

Well, herein lies the problem, many people will be tempted to go out and spend that kind of money for something they always wanted, because it's deductible. They won't really understand that the deduction will only save them, perhaps 40% of the price - and they still have to pay more than 50% of that cost out of pocket. And they will go into debt for something they don't really need.

On the other hand, someone who really could use this piece of equipment and make it pay, may suddenly be able to afford it. (Think of movie theaters converting to digital projectors ...)

According to the plan:

Under the President's proposal to speed up tax relief, 92 million taxpayers would receive, on average, a tax cut of $1,083 in 2003.

46 million married couples would receive an average tax cut of $1,716.
34 million families with children would benefit from an average tax cut of $1,473.
6 million single women with children would receive an average tax cut of $541.
13 million elderly taxpayers would receive an average tax cut of $1,384.
23 million small business owners would receive tax cuts averaging $2,042.

One glaring thing that is missing from the plan is cut on taxes on Social Security Income. Right now, despite the fact that people paid for Social Security with after-tax dollars, they are paying taxes on up to 80% of their Social Security Income. Why isn't that in the plan? That's also a double tax. Of sorts.

Doesn't Bush want justice for the grey-haired crowd?

Never mind.

All of this wonderful. We can all use the cuts in taxes.

But, who's going to pay for them?

Let's face it, our budget has increased due to 9/11, the impending war in Iraq, and the silent threats of terrorist action, which have increased the Federal costs of security, innoculations costs, and vigilence.

That money has to come from somewhere.

And nowhere in the Stimulus package did I see anything that shows an increase in taxes on anything.

So, there's no offsetting increase in the taxes on the wealthy, or on corporations. The U.S. isn't raising duties or tarrifs on products brought into the country. We don't have a national sales tax, or value-added tax.

It's a short-run fix with some huge long-term consequences.

Please, take a moment and really, really look at the savings above.

Let me re-state them in terms you understand:

According to the plan:

Under the President's proposal to speed up tax relief, 92 million taxpayers would receive, on average, a tax cut of $1,083 in 2003.

46 million married couples would receive an average tax cut of $1,716. That means $71.5 per month more money per spouse. It might pay for utilities.
34 million families with children would benefit from an average tax cut of $1,473. This is worth about $30 per month, per person, for a family of four. Doesn't make a dent in their real living costs.
6 million single women with children would receive an average tax cut of $541. This is such a joke! Less than $25 per person, for mother and child. Barely pays for a healthy breakfast.
13 million elderly taxpayers would receive an average tax cut of $1,384. This one is significant. Over $115 to people with fixed incomes, that have already been cut by so many factors. This could make the difference between having heat or not this winter, or air conditioning in the summer. (This is not a luxury. Seniors die because they can't afford to pay the high cost of these 'luxuries'.)
23 million small business owners would receive tax cuts averaging $2,042. Not too bad. About $170 per month. And of course, this assumes the business can afford to take advantage of the $50,000 increase in Equipment Expensing. Most won't. So, the reality is that most businesses won't even benefit by half that.

In fact, shall I tell you what a joke that business benefit really is? If the business owner were to spend just a bit more energy on marketing or providing exceptional customer service, they could generate that kind of money by just getting one or two new customers a month.

The reality is, that most people will change their withholding, or the IRS will issue new tables, so they will get these tax benefits throughout the year, in their paychecks. Getting these small, extra amounts, people will squander the money. They won't set it aside to use it for the big things, because it will be barely noticeable in their net pay. So, it won't really help.

So, while, overall, the administration gets lots of publicity for this great stimulus package, it's irresponsible and not really very valuable.

This will cost America so much more in the coming years.

This would be such a great opportunity and time for President Bush to establish himself as a great leader.

Why not inspire Americans to be more creative about improving their companies and their businesses to be better than they are?

Why not inspire people to stop their petty squabbles, and start focusing on being productive?

Why not challenge companies to reward their employees for providing constructive ideas to improve the whole company's bottom line, not just their own departments?

Why not inspire Boards of Directors to stop rewarding corporate executives for short-term successes in their own divisions, that really result in long-term costs and neglect to the whole business, or to other divisions?

Why not just inspire us? We need another, "Ask not what your country can do for you, but what you can do for your country!"

It's time for greatness, not boondoggles.

If the President of the United States won't do it, we should. I say, Americans should reject the Economic Stimulus Package and strike out to improve our finances on our own.

Let the President and your Congressfolk know how you feel.

Eva Rosenberg
Your TaxMama

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