NCPA - National Center for Policy Analysis

The Tax Budget: What to Leave Behind?

May 15, 2003

In order to reduce the size of the president's proposed tax cuts to the Senate's self-imposed $350 billion cap, Senate Finance Committee Chairman Charles Grassley (R-Iowa) has proposed phasing in the reduction of the tax on dividends and then having it return after a one-year elimination. According to the Joint Committee on Taxation (JCT), Senator Grassley's scheme would only cost $91 billion.

But even at a minuscule $91 billion -- less than a fourth of what President Bush proposed -- the dividend plan would not fit into the Senate's cap. In committee, the dividend provision was further limited to an exemption of just $500 per taxpayer and Senator Grassley proposed raising revenues by $63 billion.

The Bush Administration rejects the $500 cap as unacceptable. But it still has not decided how best to pursue its goal, given that there is really just $80 billion available at this point for whatever it chooses to support. Two options seem to be emerging.

One is to press for full elimination of double taxation for just 3 years and then revisit the issue later.

  • According to the JCT, this would cost $78.5 billion between 2004 and 2006.
  • After that, dividends would be taxed as they are now.

The other idea is to do some variation of the proposal from House Ways and Means Committee Chairman Bill Thomas.

  • Cutting the dividend tax and the capital gains tax to 15 percent could be done for 4 years at a cost of $89 billion.
  • Raising that rate to 16 percent or 17 percent would get that figure down under $80 billion.
  • Some economists believe that this would give the economy more of a boost than a temporary elimination of double taxation.

In the days to come, President Bush will have to choose.

Source: Bruce Bartlett, "The Tax Budget: What to Leave Behind?" National Center for Policy Analysis, May 15, 2003.

 

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