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Impact of Bush plan open to interpretation

Experts say economy hard to predict

By Sean Loughlin
CNN Washington Bureau

Bush announces his economic stimulus package Tuesday in Chicago.
Bush announces his economic stimulus package Tuesday in Chicago.

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CNN's John King reports on President Bush's plan to eliminate taxes on stock dividends (January 7)
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Lou Dobbs anchors CNN's special coverage beginning at 1 p.m. ET of President Bush's address Tuesday on his economic stimulus package.

WASHINGTON (CNN) -- A giveaway to the rich or a needed tonic for a lackluster economy?

That's the question dominating the political landscape with President Bush's $670 billion, 10-year economic stimulus package. The plan has set off a debate about who benefits and its projected impact on the economy.

Democrats decry the series of proposals -- which include eliminating the tax on dividends, accelerating income tax reductions and boosting child tax credits -- as a giveaway to the wealthy. "Class warfare," replied Bush.

Republicans say that, if enacted, the Bush plan would provide a needed jump-start to the economy by bolstering investor confidence, encouraging businesses to expand and invest, and giving Americans more money to spend.

The truth, say experts from a variety of think tanks and with different backgrounds, likely lies somewhere in between. Neither side is completely wrong; nor are their assertions immune to challenge.

Part of the problems depends on definitions -- who, for example, is rich? -- and the uncertainty that is inherent with any discussion of the economy. Who can say with certainty how the economy will react to a proposal that will likely change before it becomes law?

"One guesses with the economy like one guesses with the stock market," said Bill Frenzel, a budget and economics scholar at the Brookings Institution and a former Republican congressman from Minnesota. "There are some basic rules, but it doesn't always wind up the way you like it."

The centerpiece of the Bush package is his call to eliminate personal income taxes on corporate dividends. With an estimated price tag of $300 billion, that element of the plan has stirred the most debate.

There is no disputing that Americans with higher incomes invest more in the stock market -- and thus have more to gain by a cut in the dividends tax -- than Americans with lower incomes. Figures from the Internal Revenue Service illustrate that point.

About 15 million tax returns with an adjusted gross income of less than $50,000 had a total dividend income of $26.9 billion, according to 1998 IRS figures. Far fewer Americans are at the top income brackets, but they have more invested in stocks and bonds. According to the IRS, roughly 200,000 income tax filers reported more than $1 million and had about $25.4 billion in dividends.

An analysis by the Urban-Brookings Tax Policy Center found that Americans earning $40,000 to $50,000 a year would save, on average, $84 in their annual tax bill if the dividends tax is eliminated. Those earning $1 million or more would save an average of $27,000, according to this analysis.

"It's not a very well-designed stimulus package because most of the money goes to higher income people who are least likely to spend it," Len Berman, co-director of the Tax Policy Center, said of the Bush plan. Berman and some other experts argue that more money should go to lower-income people because they have less of a financial cushion and are more likely to spend any money they get.

But other budget experts dispute that point and raise the question of fairness, highlighting another undisputed point -- wealthier Americans pay more in taxes than lower-income Americans. Rea Hederman, director of operations for data analysis at the Heritage Foundation, says that the top 10 percent of income earners pay about 70 percent of all income taxes.

"If you pay more in taxes, you get more back," Hederman said. "That's just the way our tax system is structured."

Then there is the president's argument that a stronger economy benefits everyone. The theory goes like this: Businesses will expand, hiring more workers and those workers will have more money to spend.

But that outlook depends on a host of unknowns, including the large variable of how the war on terrorism might unfold.

"The idea that the federal government can control the economy like a master can control a pet is erroneous," said Hederman. "There's no magic wand that Bush can wave."

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