In an economic stimulus plan twice as big as anticipated, US President George Bush will today announce the elimination of tax on corporate dividends and the acceleration of tax breaks for all taxpayers, including those in the top income brackets. Leaked reports of the long-awaited package, which Mr Bush will outline in a major speech in Chicago today, caused a strong rally on Wall Street when markets opened yesterday.
Republicans said the stimulus package was about creating jobs and new business investment but Democrats said that it favoured the rich.
Until recently Mr Bush had considered reducing tax on dividends by just 50 per cent and eliminating the richest taxpayers from his accelerated tax breaks.
However, after a weekend of intensive internal debate and lobbying from Republican pressure groups, the president decided to go for an ambitious economic package that will become the centrepiece of his re-election bid in 2004.
The package will cost $600 billion (€572 billion) over 10 years, twice as much as many Republican strategists were predicting as recently as last week. Half of this will come from the dividend tax cut.
Mr Bush is also expected to include an extension of expired unemployment benefits for 750,000 people, improved child tax credits that will mean tax rebates for many parents, and $10 billion in aid to state governments in financial trouble - all moves that will blunt Democratic criticism.
The White House will send the package to Congress where Republicans hold a majority in both houses, though it will need some Democratic support to become law by spring as Mr Bush wants. The Democrats yesterday unveiled their own tax-cutting stimulus plan.
Challenged yesterday that the package was geared towards higher income Americans, White House spokesman Mr Ari Fleischer said that it would encourage spending, promote investment and help the unemployed. Some 92 million taxpayers would this year receive a rebate of $1,083, and 46 million married couples would get rebates of $1,716, he said.
The elimination of the tax on dividends would remove an anomaly where dividends are taxed twice, first as income earned by a company and then as income to shareholders, White House officials said.
Almost three quarters of the benefit in 2003 from eliminating the dividend tax would go to those with annual income of more than $100,000 - fewer than one in ten of all American taxpayers - and almost a quarter to those making more than $1 million annually, according to statistics compiled by the Urban Institute and the Brookings Institution.
Tax breaks scheduled for 2004 and 2006 will be brought forward and will apply to all taxpayers, including the top bracket of individuals with income above $311,950 annually, according to the Wall Street Journal, which said that Mr Bush had included the richest Americans after a storm of protest from some of his political supporters. The top income tax rate will now fall from 38.6 per cent to 35 per cent in 2004.
Treasury Undersecretary John Taylor defended the administration's stimulus programme, designed to produce an economic stimulus of up to $100 billion in the first year, saying that it would improve the economy's ability to grow in both the short and long run.
Eliminating taxes on dividends would do little to spur economic growth or reduce the unemployment rate, according to two leading economists in an analysis delivered at the annual meeting of the American Economics Association at the weekend.
Other economists on the panel did not challenge the conclusions of Mr Allen Sinai of Decision Economics and Mr Andrew F. Brimmer, a former Federal Reserve Board member, while several criticised the proposed stimulus package as increasing federal budget deficits and long-term interest rates.
"The president is trying to pull a fast one, to put money in the pockets of the richest Americans over a long period of time while providing very little help for regular people," said Democratic Senator John Edwards of North Carolina.
