Posted on 04/30/2003 7:36:39 PM PDT by NormsRevenge
By MARY DALRYMPLE, AP Tax Writer
WASHINGTON -
Federal Reserve (news - web sites) Chairman Alan Greenspan (news - web sites) undercut President Bush (news - web sites)'s case for new tax cuts Wednesday, saying a provision the White House badly wants should be offset by either spending cuts or tax increases elsewhere.
Meanwhile, a key House Republican proposed lowering capital gains tax rates as an alternative to the top Bush priority — eliminating taxes on stock dividends.
Ways and Means Committee Chairman Bill Thomas, R-Calif., told Republicans on his panel that the idea of treating dividends like capital gains — and cutting capital gains taxes — stands a better chance of approval than simply doing away with taxes on dividends, the most costly and most debated part of the president's proposal.
Thomas said that he was looking at lowering the 20 percent capital gains rate to 15 percent. Low-income taxpayers who currently pay a 10 percent rate would pay only 5 percent. Dividends would be taxed at those capital gains rates rather than the higher rates on earned income.
A capital gains tax cut would benefit a broad range of investors, not just those who hold stock in companies that pay dividends. It also would cost the Treasury less revenue than eliminating taxes on dividends, said Rep. Kevin Brady (news, bio, voting record), R-Texas, who is also on the tax-writing Ways and Means Committee.
Thomas said he plans to finalize the package on Thursday and consider the bill in his committee on Tuesday. The House could debate the bill by the end of next week. "I think they'll be very excited," said House Majority Leader Tom DeLay, R-Texas.
Thomas will in some form include each piece of the growth plan that Bush proposed as the centerpiece of his domestic agenda. Bush asked Congress to accelerate planned reductions in income tax rates, increase the child tax credit to $1,000 and the standard deduction for married couples, and eliminate taxes on corporate dividends. He also proposed increasing the amount small businesses can expense to $75,000.
Greenspan said that while eliminating the tax investors pay on dividends would have long-term advantages for the economy, rising federal deficits require that such a move be offset by either spending cuts or tax increases elsewhere.
"I haven't changed my view from where I was in February," Greenspan told the House Financial Services Committee.
Presidential spokesman Ari Fleischer (news - web sites) said he did not see Greenspan's position on the tax cut as criticism or opposition to it. "He has had a very nuanced statement about it, but certainly never said he was opposed to it," Fleischer said.
Bush's proposal for $726 billion in new tax cuts over the next decade has no such offsets, and Senate GOP leaders have promised Republican moderates worried about rising budget deficits that any cuts higher than $350 billion will be paid for through spending cuts and tax increases elsewhere.
"We want to fight for as high a number as possible," Senate Majority Leader Bill Frist of Tennessee told reporters at the White House on Wednesday after he and other top Republican leaders met with President Bush. He promised to work aggressively to win more than $350 billion in tax cuts by closing tax shelters or through spending cuts.
The White House and its supporters in the Senate want to make sure the dividend tax cut survives in some form. "We need to eliminate the double taxation of dividends," Commerce Secretary Donald L. Evans said after meeting with senators.
Options being discussed in the Senate include a temporary elimination of the dividend taxes, which probably would be extended in later years. Republican aides working on the legislation said the taxes could be phased out over several years, or taxpayers could be told to exclude $1,500 of dividends from their taxed income.
Democrats said the dividend tax cut will do little to stimulate the economy and create jobs because it will not put money into the hands of people who will spend it immediately.
"This is not the package it's cracked up to be about creating jobs," said Sen. Jon Corzine (news, bio, voting record), D-N.J.
Thomas argued that tax cuts will help reverse deficits by spurring economic growth. "I think these deficit dollars are being spent on an investment in the economy," he said.
Greenspan said tax cuts aimed at capital investment, not consumer consumption, will do the most for the economy. That could give a lift to tax breaks for small businesses, such as increasing the limits on expensing from $25,000 to $75,000.
Lobbyists for small businesses said they expected it to be left out, but Rep. Jerry Weller (news, bio, voting record), R-Ill., indicated that House members will lobby to have it included. "I think they're going to be very happy," he said.
That's because the president isn't a supply sider, and he has a consistent record for ineffective tax cuts as a chief executive. We're lucky to even see any tax cut related to investment, and we can thank Glenn Hubbard for that, who got fed up and left the administration a couple of months ago.
What a novel idea! This is something California definitely is not leading the nation at...and should be!
Someone can tell me if I am wrong, but it was my understanding that the idea behind eliminating taxes on dividends was to encourage companies to pay out dividends to investors rather than encourage holding. I thought it was related to reducing some of the bad practices that led to cooking the books, Enron's, etc, where the small investor (stock holder) is the biggest loser. It made a lot of sense to me when it was explained.
Reagan the optimist would have explained it as a matter of principle -- the elimination of double taxation. The current crowd of pessimists and government control freaks see every team of corporate management as crooks. The government should make it very difficult for them to decide what to do with the money.
I wholeheartedly agree about the double taxation issue. But I don't think of protecting the investor from unaccountable corporate greed as being a government control freak. It is obvious from all the scandels of late that some form of responsibility and accountability has to be placed on those who invest and spend other peoples money. On the other hand there are many companies who are very responsible about this. Any regs put in place should not hamper their ability to generate product, revenue, profit, and growth; ultimately increasing the value of the investors stock.
I am not enough of an economist to suggest the details of implementing this. I only see this as making sense.
I agree with your sentiment. However, if what the pessimists selling this tax cut say is true, a company's ability to invest in its business will be hampered if pressure is put on them to pay higher dividends instead. A much better law would require independent boards of directors for large corporations.
In actuality, I don't believe the pessimists. I don't think this tax cut will hinder the crooks one bit. Nor do I believe that it will hinder good management from investing in its business. Management is far too nimble for that. One thing people should note is that many companies already avoid double taxation on dividends by finding ways to avoid taxes on income used to pay for them. In that case, people receiving dividends from such strategies won't receive a tax cut.
Capital gains taxes are imposed only against shareholders after they've sold their shares at a gain. In a way, both are double taxation, however, a dividend tax is clearly pure double taxation.
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