Bush tax plan's complications and costs

Despite the plug President Bush gave his proposed $674 billion tax cut in his State of the Union address last week, Congress will likely shrink it.

"We are going to get a pretty big package," says Greg Valliere, chief strategist at Schwab Washington Research Group. "But the details will change considerably."

One problem is that the Bush changes, especially cutting taxes on corporate dividends, would add complexity to an already complicated tax system.

The tax code has grown year by year (see chart).

"Anytime you add something like this with a lot of wheretos and wherefores you make a lot of work for tax lawyers and accountants," says Stanley Collender, a budget expert at Fleishman-Hillard Inc., a Washington consulting group.

Already, when Uncle Sam raises $1 in revenue, costs of tax preparation and the government's tax collection approximate 10 cents. So the total cost of the US tax system today is about $110 billion, says Joel Slemrod, an economist at the University of Michigan Business School, in Ann Arbor.

Many Democrats oppose the centerpiece of the Bush plan, ending "double taxation" of stock dividends. One reason is that the bulk of the $364 billion in tax benefits go to the well-to-do. "Dead on arrival," said Senate minority leader Thomas Daschle.

Even some Republicans have troubles with the plan. House Ways and Means Committee Chairman Bill Thomas (R) of Calif. told the Washington Post that the plan actually leaves some dividends received by investors taxed and others not.

That adds complexity. If a firm pays corporate tax on its earnings, it can issue a tax-free dividend. But it may take years while a corporate audit goes on to determine if that is the case.

A member of Congress visiting constituents may have trouble trying to explain to a widow why some of her stock dividends are tax free, and some aren't, suggests Douglas Shackelford, a tax professor at the University of North Carolina, in Chapel Hill.

There is some speculation that Congress may agree to taxing only half of dividends, or taxing them at the 20 percent capital-gains rate.

In theory, ending the corporate tax entirely would end a great deal of tax complexity. But doing that would be too costly, even for the tax-cutting Bush administration.

One reason the tax cut will likely shrink is the growing concern about a swelling budget deficit. Last week, the Congressional Budget Office projected a deficit this year of $199 billion and a cumulative $407 billion deficit from 2003 to 2007.

These numbers are a lot worse than the CBO projected last August. But because the CBO, in making projections, follows rules set out by Congress, budget experts see them as still unrealistic.

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