Bush's Tax Surprise

By JOHN DICKERSON

DEMOCRATS IN CONGRESS are gearing up to battle President Bush over his tax-cut plan, arguing that it will favor the rich. But they may be in for a fresh shock. Reports have circulated that Bush's plan, which he intends to announce this week, will include a 50% cut in the amount shareholders are taxed on company dividends. But senior officials tell TIME that Bush will go even further. To encourage investors to re-enter the stock market and foster corporate responsibility, he is set to propose that taxes on dividends be eliminated entirely.

Officials say that while the President wants to boost employment numbers, he also believes the health of the stock market is a key indicator in the modern economy. Allowing investors to keep more--or all--of their dividends will not only nudge them back into the shaky market, proponents argue, but also encourage greater corporate responsibility by making CEOs focus on delivering a consistent return to investors rather than pushing for unrealistically high stock prices. It doesn't hurt that seniors, a crucial voting bloc, would receive about half the benefits from such an exclusion, say Administration officials.

The President believes the full cut is a matter of fairness, according to aides. "If it is wrong to tax dividends, it's still wrong if you only tax 50% of them," says a senior official. Bush will also call for speeding up the 2001 tax breaks for all income brackets, to goose consumer spending. "I am concerned about all the people," he said last week to a suggestion that his proposals for accelerating the breaks should be limited to the less well off.

The plan, which would cost the government nearly $600 billion over 10 years, will be "heavily front loaded" in an attempt to spark the flagging economy, say Administration sources. It will also include incentives for corporate investment and tax breaks to spur small-business purchases of new equipment. All this will be sold as a way of creating jobs--the central message of a choreographed weeklong roll-out that will also feature Vice President Dick Cheney and Secretary of Commerce Don Evans. "This is not about negotiating with the Hill," Bush insisted in a video conference call with his economic team as they tugged on the remaining questions about the shape of the package. "This is about doing what's right for the economy." He convinced his staff. Now he has to convince the country. --By John Dickerson