Tax Cut Revisited
by Matt Fowler

Like the tax package passed in 2001, this round of cuts would provide only temporary relief. All of the cuts phase out by 2011, and some well before then. Nevertheless, most taxpayers can expect to keep more of their earnings for at least a year or two.

Here's a summary of the four main aspects of the new cut, and how each will work:

- Dividends and Capital Gains - Freezes the dividend tax at 15% for anyone in the top four tax brackets. Long-term capital gains tax rate falls to 15% from 20%.

- Individual Rates - The top rate drops to 35%, and other brackets are nipped by two points. A married couple with $50,000 in income saves $333.

- Marriage Penalty - The standard deduction for married couples increase to $9,500, double the deduction for single filers.

- Child Tax Credit - Immediately boosts the child tax credit to $1,000. Some 24.4 million families could get a $400 rebate check later this summer.

The measure is considerably smaller than the $726 billion package the president originally sought, and it passed the Senate only with a tie-breaking vote by Vice President Dick Cheney. President Bush had originally proposed twice that amount, but many say the White House considers the cut a victory anyway. The central goal is to stimulate the economy through new and accelerated tax breaks that will benefit almost everyone who pays taxes. The plan is designed to have both direct and predictable effects- lowering the taxes due- as well as indirect effects, such as bolstering stock prices and increasing business spending, which are more difficult to verify in advance.

The Bush plan is multifaceted. For individuals, it calls for eliminating taxes on shareholder dividends, increasing the child credit from $600 to $1,000, expanding the bottom 10-percent bracket, lowering tax rates for those brackets above 15 percent, and giving special relief to married taxpayers through an expanded 15-percent bracket and an increased standard deduction. For small businesses, it offers an increase in the amount of equipment purchases that can be immediately written off, rather than depreciated, from $25,000 to $75,000.

In late July and onward, the new law will provide families with kids rebate checks worth $400 for each child. The law will also give new breaks to married couples; the standard deduction for married couples will be raised from the current $7,950 to $9,500 (twice the standard deduction for single people). Also, the 15% tax bracket has been expanded for married couples from its former limit of $47,450 in taxable income to a new top of $56,800 -- which is twice the limit for singles. The savings would be $1,302.

In addition the new tax law will cut rates for higher-income taxpayers and investors. After the fact that capital gains topped out at 20%, while dividends were taxed as ordinary income and just subject to higher income tax rates, the new law will lower the rates on capital gains and dividends to 5% for people in the 15% tax bracket or lower. That now includes singles with taxable income of $28,400 or less, and married couples with taxable incomes of $56,800 or less.

The President and proponents of the new bill are confident that this is a major step in jump starting the lagging economy as well as reducing unemployment (currently at 6 percent). Earlier this month Bush stated, "We have taken aggressive action to strengthen the foundation of our economy, so that every American who wants to work will be able to find a job."