Thomas Offers Compromise on Dividend Tax Cuts

The White House gave an approving nod Thursday to a House tax cut plan that would replace the centerpiece of the president's recipe for economic growth, the elimination of taxes on corporate dividends paid to shareholders.

Cabinet officials continued to push for the president's version of the tax cut but stopped short of criticizing the approach taken by Ways and Means Committee Chairman Bill Thomas, R-Calif. (search) Thomas would tax dividends like capital gains and reduce the capital gains tax to 15 percent from the current 20 percent. Low-income taxpayers who currently pay a 10 percent tax would pay 5 percent.

Dividends are currently considered ordinary income and taxed at rates as high as 38.6 percent. Cutting the tax on dividends to 15 percent would represent a reduction of more than half for top income earners.

"The House in our view has made great progress on a jobs and growth plan that includes all of the elements of the president's package, Treasury Secretary John Snow (search) told reporters. "Going forward we intend to build on this progress and continue to work with the House and Senate to pass the 100 percent abolition of the double-tax on dividends."

Democrats quickly declared their opposition to the capital gains and dividends tax cuts. "People are hurting. They are afraid of losing their jobs, losing their health care, having to take their kids out of daycare," said Rep. Charles Rangel, D-N.Y. "And what do the House Republicans offer as a way to help our economy? A capital gains tax cut that mainly goes to wealthy investors."

The capital gains and dividend tax cut consumes more than half the $550 billion the House budgeted for tax cuts through 2013.

The Senate continued to search for ways to include a dividend tax cut in its smaller, $350 billion budget for a decade of tax cuts. Senate Majority Leader Bill Frist, R-Tenn., said he prefers complete elimination of dividend taxes over the House approach.

He said the he will consider temporarily repealing the taxes on dividends, under the assumption the tax cut will be extended in future years. "Six, seven years from now, nobody's going to be arguing to increase taxes," he said.

The Senate Finance Committee wants to consider the bill on Wednesday, but Republicans and Democrats remain stuck on the dividends tax cut, and whether to give aid to cash-strapped states. "We're far apart," said Sen. Max Baucus of Montana, the top Democrat on the panel.

The remainder of the House plan cuts taxes paid by individuals and small businesses in a bid to put money in the hands of consumers and investors. It mirrors the framework outlined by President Bush earlier this year. Thomas plans to consider the bill in his committee Tuesday and expects the House to debate it Friday.

Income tax rates already scheduled to decrease in future years will start to drop beginning retroactively on Jan. 1, 2003. The child tax credit would increase this year from $600 per child to $1,000 and stay there for three years. Some married couples would also get a larger standard deduction for three years, beginning immediately. Fewer people would be hit by the alternative minimum tax.

Small businesses would be able to deduct up to $75,000 of their expenses for three years, and businesses also could depreciate up to 50 percent of their assets in the year purchased. Additional provisions allow businesses to write off more of their losses.

Thomas said those provisions would allow businesses to "spend and hire at a far greater rate."

In order to make the entire package fit within the $550 billion limit set earlier by the House, the tax breaks directed toward married couples, children and the alternative minimum tax last only three years.

Lawmakers anticipate those provisions will prove so popular that Congress will not allow them to expire at the end of three years. "No one believes there will be any difficulty in extending $1,000 child (credit) and not let it snap back to that lower number," Thomas said.

Critics say that writing temporary tax laws -- that will inevitably be extended in the future -- masks the true cost of tax cuts and hides mushrooming deficits.

The Congressional Budget Office (search) has identified more than 20 items already in the tax code that are routinely extended and will cost the Treasury $1.2 trillion if extended through 2013.

Robert Greenstein, executive director of the Center on Budget and Policy Priorities, a liberal advocacy group, said pursuing more of these short-term tax cuts will lead to "almost an Enron-type budget," where the effect of tax cuts on the federal deficit do not appear.

"I think this is a very serious issue," he said. "If they can't find the money to do it now, how do they suddenly find the money a few years from now?"