A number of lawmakers might be working to shrink the size of the president's big-bang tax-cut package. But much of the action behind the scenes indicates that the Bush plan is still standing tall.
Pro-growth members of the Senate Finance Committee are right now proposing a very good compromise for the president's tax-cut package. The reworked plan will achieve 100 percent of the centerpiece dividend tax cut requested in the original package by implementing 50 percent of the exclusion this year (retroactive to Jan. 1, 2003), 75 percent in year two and 100 percent in year three. This will be coupled with an excludible dividend amount (EDA) for after-tax retained earnings (corporate capital gains), which will also go live in year three (2005). All this will give corporations ample time to set up the complex accounting procedures needed to provide accurate information to investors.
As part of this compromise, the whole dividend package will be sunsetted in 2008 -- when Congress will have the option of full renewal. Consider this the camel's-nose-under-the-tent strategy. Once the camel puts his nose under the tent, he always goes right for the full plate of food in the middle. There's almost no way politically that Congress is going to repeal this tax cut.
What's more, all the marginal tax-rate cuts will be accelerated in this proposal, along with the marriage penalty and the children's tax credit. Bonus expensing for plant and equipment cost recovery for small business S-corporations will remain in the package.
This is exactly the sort of compromise that will provide a pro-growth tax jolt to the stock market and the economy by strengthening incentives for capital formation. And under this new plan, the full dividend piece will cost less than $145 billion, in static revenue terms, compared with the much higher price tag of the administration's original package. The whole tax cut is now estimated to cost $350 billion over five years, thereby meeting the demands of GOP moderates George Voinovich and Olympia Snowe.
Former Bush economic advisor Glenn Hubbard is thinking along similar lines, with a proposal that merits attention. He would like to see the president's full plan put into place for three years. In year three, he says, let the political wars begin. Would Congress then legislate a humongous tax hike? That's what democracy is all about.