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US Administration Favours Dividend Tax Cuts

by Mike Godfrey,, New York

04 December 2002

Still trying to find a magic recipe for tax change that will boost the economy without costing an arm and a leg in terms of revenues, the White House is revisiting a proposal to reduce dividend taxation that was current in the summer. In the US, corporate dividends are paid post-tax, and carry no tax credit, meaning that they are taxed again in the hands of recipients.

Economists have long argued that this double taxation distorts investment, depresses the stock market and increases the cost of capital. Democrats will say that any reduction in dividend tax is elitist, but with Republican control of both houses of Congress the administration is less obliged to placate Democratic swing voters than it used to be.

"In terms of bang for the buck [dividend-tax reduction] is really the biggest," said White House economic adviser Glenn Hubbard. The cost of a reduction is estimated at up to $25 billion a year, but much of this might be recouped through increased tax payments on stock gains and corporate profits.

Democrats favour a proposal to suspend payroll taxes for the coming year. White House spokesman Ari Fleischer criticized the idea because it would diminish funds earmarked for Social Security. Mr. Hubbard also rubbished it as a "temporary tax change" which wouldn't fundamentally boost long-term economic growth. "The notion of a one-shot check having much of an effect is pretty far-fetched," he said.

While Lawrence Lindsey, head of the White House's National Economic Council, seemingly supports investor tax breaks, Treasury Secretary Paul O'Neill has doubts about a dividend-tax cut, thinking that other tax breaks might be more effective in stimulating economic growth quickly.

Any dividend-tax break would be included in a broader tax package, which also is likely to include an acceleration of cuts included in Mr. Bush's original $1.35 trillion 10-year package.

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