The Administration also is considering two other approaches to help corporations. One would target investment incentives to such hard-hit industries as tech and telecom. Another would slash rates for all corporations.
Business leaders, naturally, say tax relief couldn't come soon enough. A new survey by the Business Roundtable reports that 64% of CEOs expect growth of 2% or less next year. "It may sound self-serving, but cutting the corporate tax would help," says Herbert M. Baum, CEO of Dial Corp. in Scottsdale, Ariz. "It would allow us to keep more people."
Also topping the wish list of many execs: eliminating the double taxation of dividends. The President has "a great opportunity to pass a stimulus package," says Allstate Corp. CEO Edward M. Liddy. "Even something as simple as ending taxation of corporate dividends" would help. Bush isn't likely to do that because its $75 billion annual price tag is prohibitive. But he may allow investors to get up to $1,000 in dividends tax-free.
While corporations will receive some new tax benefits, the foundation of Stimulus III will be Bush's 2002 campaign promise to make his individual tax cuts permanent. Many of the measure's most popular provisions, including repeal of the estate tax and marriage-penalty relief, expire in 2011. Bush badly wants to lock in those cuts, and so does the public. In a Nov. 8-10 Gallup Poll, the idea was favored, 64% to 29%.
The biggest battle will come over whether to accelerate the 2001 rate reductions that aren't scheduled to kick in until 2004 and 2006. Such a step would bring the top tax rate, which was 39.6% in 2001, down to 35%, cut the old 36% rate to 33%, trim the 31% bracket to 28%, and slash the 28% rate to 25%. Advancing the 2004 rate cut into 2003 would trim taxes by about $17.1 billion, according to a new analysis by the Urban-Brookings Tax Policy Center. Moving up the 2006 rate cuts as well would pump a total of $40 billion into the economy next year. Let 'er rip, says Joseph M. Grant, CEO of Texas Capital Bancshares Inc. Last year's tax cut, he says, was "too little, with too much delay."
Many demoralized Democrats will resist cutting rates. The problem, they argue, is that such reductions won't stimulate the economy since scant relief will go to the lower- and middle-class families who are the most likely to spend it. Speeding up the 2004 tax cut, for instance, would put an average of less than $35 in the pockets of families earning up to $50,000, according to the Tax Policy Center. But families making $1 million-plus would get an average tax cut of $18,745.
Bush will not only have to sort out the elements of a cut, he'll also have to pick the size. A too-modest one would have little impact on a $10 trillion economy. But with Wall Street economists predicting deficits of $250 billion or more in '03 without stimulus, a supersize cut could throw the budget deep into the red and put upward pressure on interest rates.
Still, the U.S. also has an ailing economy. Dr. Bush's prescription will depend on just how sick the patient is. He has two choices: a big stimulus and a bigger stimulus. And the one he picks is likely to have a powerful effect on the economic future of the nation--and his own political future.
Copyright 2002, Bloomberg L.P.
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