As a revision of the tax code, it's so convoluted that only a tax accountant could love it. As a goad to investor behavior, it's shockingly ineffective. And as a piece of fiscal policy, it's a disaster. Yep, the new tax cut President Bush signed into law last week is so bad that it will inadvertently give a sizable boost to the economy and the stock market -- but not in the ways anybody intended. How complicated is this new law? The child tax credit, to take one example, increases to $1,000 in 2003 and 2004, then goes to $700 for 2005 through 2008 as the size of the credit reverts to the limits set by earlier tax legislation, then goes back up to $800 in 2009, and finally returns to $1,000 in 2010. And if your income is above $110,000 for married couples filing jointly or $75,000 for singles, the credit declines by $50 for every $1,000 your income is above the threshold.
The Dividend Labyrinth
Want to rejigger your portfolio to take advantage of the new, lower tax rates on dividends? Good luck. Yes, the tax on dividends was cut by the bill to 15%, as was the rate on capital gains. For taxpayers who were paying rates of 27%, 30%, 35% or 38.6% on dividend income, depending on their tax bracket, the reduction to the new 15% rate could be huge. Could be, that is, as long as the dividends you're collecting are the right kind of dividends. Take the payments that real estate investment trusts (REITs) make to investors. They're not dividends as far as the tax bill is concerned. Investors in REITs will still owe taxes at the higher rates for regular income because the REITs don't pay corporate taxes on the income they distribute to investors.