Senate Underestimates Cost Of Dividend Tax Cut By $70bn

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

22 May 2003

The cost of suspending taxes on dividend earnings as part of the Senate's $350 billion tax cut package has been underestimated by $70 billion, it emerged this week.

The miscalculation by tax experts from the Joint Committee on taxation could lead to further complications in the negotiations between the House and Senate, as both chambers attempt to merge the differing aspects of their tax cut plans.

The error is said to have arisen from the taxation committee's mistaken belief that the tax cut applied to current-year earnings rather than accumulated earnings, according to a spokeswoman for Max Baucus, the ranking Democrat on the Senate Finance Committee.

Under the Senate plan, dividends taxes will be cut by 50% this year, and then will be phased out, albeit temporarily, for the subsequent three years. The House meanwhile, proposes to cut the top rate of dividend tax and capital gains tax to a flat rate of 15%. At present, investors pay as much as 38.6% on dividends and 20% capital gains tax.

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