Plan Gives Most Benefits to Wealthy and Families

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Mr. Bush's tax plan to eliminate dividend taxes overlooks a huge population of taxpayers: more than 40 million people who put money into tax-deferred individual retirement plans like the 401(k) plan.

Neither the money set aside in a 401(k) plan nor the dividends that accumulate are subject to any tax until a person withdraws the money after reaching retirement age.

But when a person does withdraw money, the government taxes all of it as ordinary income — regardless of whether the money came from dividends, stock market profits or the person's original contributions.

In effect, that means that people who buy stocks and accumulate dividends in a tax-deferred retirement plan will eventually be taxed on those dividends. But the much smaller number of people who currently pay big taxes on dividends will get a big new break.

Are we all clear on this? If you can afford to have investments outside of a 401(k) then the dividends on those investments are free and clear according to the Bush plan. But, if you are like the rest of us working-class saps and have your investments tied up in 401(k)s, IRAs and other similar investment vehicles then the dividends on those investments are counted as normal income and you will have to pay taxes on it when you withdraw the money. Looks the only thing the Bush administration wants to tax are the poor, the middle class, and the old maxim that no one ever went broke underestimating the intelligence of the American people.

Today, a senior administration official confirmed that the government would not change the rules and that stock dividends earned in 401(k) plans would indeed be taxed as ordinary income when it is withdrawn.

"They didn't get taxed when it was going in," said the official when asked about the issue today. "It all works out in the end," she said. "Trust me."

You'll forgive me if I don't feel all that trusting right now.