Congress Agrees Tax Cut Bill Despite Greenspan's Caution

by Leroy Baker, Tax-News.com, New York

23 May 2003

A day after Federal Reserve Chairman Alan Greenspan reiterated his opposition to dividend tax cuts, President Bush yesterday accepted a compromise version of his tax-cut plan worth $350 billion over 10 years, saying it was: "good for American workers, good for American families." On a visit to the Congress, the President said he'd sign the bill when the House and Senate finish work on it.

To keep the cost down, many of the cuts are scheduled to expire after a few years. Congress reached agreement on the bill after Senator George Voinovich, (R-Ohio), met Vice President Dick Cheney and House Ways and Means Chairman Bill Thomas, (R-Calif).

Under the compromise reached this week, the top tax rate on dividends and capital gains will fall to 15% this year. Low-income taxpayers will pay 5%, falling to zero in 2008. Business lobbies, meanwhile, were pleased that the agreed bill has abandoned the threatened repeal of the Section 911 tax break for non-resident American citizens.

Prior to the agreement, Federal Reserve Chairman Alan Greenspan had reiterated his luke-warm assessment of the tax cut package, suggesting that lawmakers should consider the impact of a high budget deficit on future interest rates.

"Changes in the longer-term fiscal outlook are very clearly a factor in the level of long-term interest rates today," the Fed chairman stressed. "The point is: deficits do matter and in any evaluation of a program, whatever happens to deficits is an intrinsical part of the analysis."

Speaking to a Congressional Committee meeting earlier in the month, Greenspan cited a recent federal economist's study, which linked high levels of fiscal deficit with increasing rates of interest. He warned that the US may well travel down this route if fiscal responsibility is not fully observed, and that ultimately, the benefits of the tax cuts could well be cancelled out by monetary tightening.

In his testimony at that time, the central banker told Congressmen: "There are powerful reasons to suspect that the elimination of the double taxation of dividends and cuts in marginal rates will elevate long-term productivity." However, he warned that: "If, however, in the process we get a significant increase in deficits, which induce a rise in long-term interest rates, that will be a significant undercutting of the benefits achieved by tax cuts."

As a consequence of falling tax revenues and the cost of the war in Iraq, the Congressional Budget Office estimated earlier this month that the nation will run a record fiscal deficit of $300 billion this year.

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