Simpler Tax Cut Is Floated
House Leaders Offer Uniform Rate on Dividends, Capital Gains
By Jonathan Weisman
Washington Post Staff Writer
Thursday, May 1, 2003; Page A04

House leaders have embraced an effort to replace President Bush's complex plan to eliminate the "double taxation of dividends" with a simpler proposal to lower taxes on capital gains and dividends to a new, uniform rate, congressional sources said yesterday.

The decision could prove fatal to the president's embattled proposal, which faces slim prospects in the narrowly divided Senate. With Speaker J. Dennis Hastert's backing, Ways and Means Chairman William M. Thomas (R-Calif.) presented committee members a $550 billion tax-relief plan that differs in many ways from the 10-year, $726 billion tax-cut plan that Bush unveiled in January.

House G.O.P. Tax Cuts Outdo Bush Plan in Favoring Wealthy
… The analysis by the Tax Policy Center at the Urban Institute and the Brookings Institution found, for example, that taxpayers with incomes of more than $1 million would get an average tax cut this year of $105,636 under the plan outlined on Thursday by Representative Bill Thomas of California, the chairman of the House Ways and Means Committee. Under the Bush proposal, the average cut for these people would be $89,509.

… By the same token, taxpayers with incomes between $50,000 and $75,000 would get an average tax cut this year of $734 under the the Bush plan and $712 under the Thomas plan; those with incomes between $40,000 and $50,000 would get an average cut of $482 under the Bush plan and $456 under the Thomas version. Similar disparities exist with the smaller tax cuts at lower income levels. Eighty-four percent of all taxpayers have incomes of less than $75,000.

The main difference between the two plans is that the president would eliminate the tax on most stock dividends but would not change capital gains taxes. The House plan would lower the tax on capital gains - now 18 percent or 20 percent in most cases - to 15 percent and tax income from dividends, now taxed at rates up to 38.5 percent, also at 15 percent.

Rich people, because they have more to invest, are the main beneficiaries of capital gains and dividends. But they have a larger proportion of total capital gains, which are profits from the sale of investments, than they do of dividends. So they benefit even more when the capital gains rate is reduced than they do from eliminating the tax on dividends.

The problem for the administration is that it doesn't serve the overall goal of passing as large a tax cut as possible. From a tactical perspective, clearly the best way to do that would be to keep the full dividend tax repeal intact, while temporarily junking the more popular provisions of the tax cut--like the increase in the child tax credit and the increase in the depreciation allowance for small business investment--and then passing them in a second bill later in the year. But thanks to the House, it looks like that strategy is now off the table.