White House May Compromise on Repeal of Dividend Tax

In what plays like a move to jumpstart a stalled tax cut bill, Treasury Secretary John Snow has praised the House Ways & Means Committee's proposal to cut federal income tax on dividends to a flat 15% along with a similar cut on taxes on capital gain income. The proposed plan "is a big step in the right direction," said Secretary Snow. "It's a lot better than current law."

House Ways & Means Committee Chairman Bill Thomas introduced the proposal last week to nods of approval from House Speaker Dennis Hastert, and even White House Press Secretary Ari Fleischer.

Mr. Fleischer called the proposal "a good, strong package that incorporates a lot of what the president wants."

While not agreeing outright to accept this change in President Bush's proposed tax cut, Secretary Snow was quick to add that the President still wants the full elimination of income tax on dividend income. "Lowering taxes on capital gains and dividends - that's good - but let's take it to zero, and we will continue to press that in both bodies" of Congress, he said.

Under current law, most gains on capital assets owned for more than one year are taxed at a maximum federal rate of 20% (10% for certain lower-income tax return filers). There is a special provision for a tax of 18% (8% for low income filers) for assets owned more than five years. Dividends are taxed at the ordinary income tax rates, which can be as high as 38.6 percent depending on the marginal tax rate of the taxpayers.

Because corporations are not allowed a deduction for the dividends paid to shareholders, this income gets taxed twice, once at the corporate level and again when it is received by shareholders. The Bush dividend tax cut proposal would keep dividends taxed at the corporate level but eliminate the tax to shareholders.

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