NEW YORK (CNN/Money) -
Democrats have panned it and Federal Reserve Chairman Alan Greenspan's opinion is only mixed. Do early reviews mean the Bush administration's economic package is headed for the cutting room floor? Not quite.
In congressional testimony this week, Greenspan voiced support for Bush's dividend tax elimination but said it was premature to enact tax and spending measures to stimulate the economy, particularly before the issue of war with Iraq is settled.
Sen. Tom Daschle, D-S.D., called Greenspan's comments the "the kiss of death" for the Bush plan. But other Washington watchers beg to differ, and think some parts of the plan will pass exactly as the president proposed.
Other elements -- such as the dividend tax cut -- are likely to pass, but in amended form. A few ideas -- notably lifetime savings accounts -- seem doubtful, but may signal legislative initiatives in future years.
Here's a look at what's most likely to get the nod from Congress, as well as what may be nixed or altered.
Some kind of dividend tax cut on the way
Observers are divided about just what kind of dividend tax cut Congress will approve. Most agree that there's little chance it will go through as Bush proposed. He called for a complete elimination of the dividend tax for individuals and said shareholders in non-dividend-paying companies might be eligible for a "deemed dividend."
The "deemed dividend" element would work like this: Instead of paying a dividend to shareholders as cash, a company might choose to reinvest the proceeds in the business. Then, shareholders would get to add this "deemed dividend" to their own cost basis, meaning they'd pay less in capital gains tax upon selling the stock.
"We think there'll be a 100 percent exclusion for dividends," said Andy Laperriere, a managing director of the International Strategy & Investment Group. But he expects the capital gains element to be dropped.
Meanwhile, Chris Edwards, fiscal policy director of the Cato Institute, a free-market think tank, expects Congress to pass a 50 percent exclusion on dividends -- that is, half your dividends would be tax-free -- and thinks there may also be a reduction in the long-term capital gains rate.
Rate relief, marriage relief, child credit a go
Edwards, Laperriere and John Barry, chief economist for the Tax Foundation, agree that four elements of Bush's plan are likely to get the thumbs up from Congress as the president proposed them.
The income tax rate cuts scheduled to come down in 2004 and again in 2006 are likely to be accelerated to 2006 levels, just as Bush proposed. The only exception may be the top tax rate, Laperriere said. Edwards disagrees: "I have a hard time believing the Republicans would compromise on that," he said.
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Parents who earn $110,000 a year or less in adjusted gross income ($75,000 for singles) should also see the child credit increased this year to $1,000 from $600.
Married couples are likely to enjoy a full reduction of the marriage penalty, originally scheduled for 2009, to be implemented this year. That means couples who file jointly would enjoy exactly double the size of the standard deduction single filers are entitled to. Also, the amount of income taxed at 15 percent for married couples would increase to twice the amount of income taxed at 15 percent for single filers.
They also think Bush's proposed re-employment accounts will get the green light. An unemployed worker who has had difficulty finding work would receive up to $3,000 that may be used for job training, child care, transportation, relocation or other job-search expenses.
"That's all easy stuff," Laperriere said.
Permanent tax cuts? Tax-free savings? Whoa, Nellie.
While you may enjoy accelerated tax rate relief this year, don't count on Congress extending that relief beyond 2010, when various measures mentioned here are set to expire. Making permanent the tax cut provisions in the 2001 Tax Relief Act is what Bush is hoping Congress will do, but Laperriere, Edwards and Barry think such a move is out of the question this year.
Given the war on terrorism and the possible war on Iraq, the uncertain budget outlook make it "unlikely that Democrats will be willing to pass a proposal that permanently reduces federal tax collection," Barry said.
Bush proposed that all IRAs be replaced this year by tax-free retirement savings accounts (RSAs) and lifetime savings accounts (LSAs). Individuals at all income levels could contribute up to $7,500 a year after-tax and have that money grow tax-free. There would be no conditions on LSA withdrawals, and conditions on RSA withdrawals would be more flexible than they are on regular IRAs.
The savings proposals have generated a lot of excitement. But Laperriere, Edwards and Barry all think there's virtually no chance Congress will give them a green light this year, given their long-term costs and all the other legislation on the docket. However, Edwards views them as long-term reforms. By proposing them now, he said, the White House is "putting a marker down to show where they want to go." Stay tuned.
One retirement plan change Congress may make, Edwards said, is to accelerate the increase in contribution limits to 401(k)s and IRAs, currently scheduled to take effect by 2006 for 401(k)s and 2008 for IRAs.
What you should do now
Do yourself a big favor and don't act on any of this information yet. That's because the news and published opinions about the Bush proposals are all about what might happen, but nothing has been passed into law. There's no guarantee that predictions -- even educated ones -- will be right, especially given how quickly the political and economic scene can change.
To be sure, you should pay attention, and move once the bills are enacted. "Understand (the plan). Know what you might want to do," said financial advisor Gary Schatsky, founder of Independent Financial Counselors. But until anything passes, "it would be reckless to make any financial moves predicated on the proposals."
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