Dividend Tax Reduction Bills Up Against Congressional Flat-Earthers

by Mike Godfrey, Tax-News.com, Washington

27 September 2002

Although the White House's initiative on further tax reductions seems to have ground to a perhaps temporary halt, some of the proposals being considered are making their own way in Congress, notably that to reduce the double taxation of dividends.

For instance, the Dividend Incentive and Tax Simplification Act of 2002 (HR 5413 IH), introduced on 19th September by a group of Republican Representatives headed by Richard Burr of North Carolina, would amend the Internal Revenue Code of 1986 to give a deduction to corporations for dividends paid and to exclude dividends from gross income. Individuals would be taxed on dividend income at capital gains rates.

The Bill was referred to the Ways and Means Committee, but there is concern that it will fall foul of the Joint Committee on Taxation's addiction to so-called static scoring, under which the effects of a tax measure are rated only in terms of their direct impact, without considering any indirect effects.

The free-market Heritage Foundation reports receiving a plea from a House staffer working on another dividend tax reduction bill as follows: 'My boss is giving a speech tomorrow on his bill ending the double tax on dividends, and the subject of "cost" may come up. JCT [Joint Committee on Taxation] has scored a reduction of the individual tax on dividends to 20 per cent as costing $400bn over the next 10 years, which would mean our bill will likely get a score of nearly $800bn. Needless to say, that is insane. Do you have any preliminary estimate he might be able to mention if it comes up?'

Most economists agree that reducing taxes often has a widespread beneficial effect on the economy. But the JCT ignores them, even though the mighty Alan Greenspan said in testimony earlier this year: "most economists would agree that in evaluating the effects of different fiscal policies, it would be far better to use what we call dynamic scoring, that is, the ability to get the interaction of the effect as well as the initial impact."

House Ways and Means Chairman Bill Thomas recently joined battle with the JCT on this issue. With the help of a newly-appointed panel of experts, Mr Thomas is urging the Joint Committee's chief of staff Lindy Paull to make use of a technique known as dynamic scoring, which he says would provide more complete and accurate information to Members of Congress. But Democratic Senators Tom Daschle and Kent Conrad responded with a letter ordering Ms. Paull to "suspend" even her current exploration of a more accurate tax model.

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