Mon, 12 May 2003

U.S. House passes US$550b tax cut bill

Agence France-Presse, Washington

The U.S. House of Representatives on Friday voted to cut taxes by US$550 billion over 10 years, giving President George W. Bush a large part of his economic stimulus plan.

The bill passed by a vote of 222 to 203.

The measure still, however, faces a hurdle in the Senate, where leaders have pledged to pass a tax cut of no more than $430 billion.

The House version was nonetheless scaled down from Bush's original "jobs and growth" package, estimated to cost $726 billion.

The House bill reduces but does not eliminate -- as Bush had proposed -- taxes on dividends paid to shareholders. It also calls for reducing taxes on capital gains, a provision the White House did not press for.

Under the bill, the tax on dividends would be limited at 15 percent, compared with the current top rate of 38.6 percent. Capital gains would be taxed at the same rate as dividends, bringing down the maximum rate from the current 20 percent.

"This economy needs help and it needs it now," House Speaker Dennis Hastert said ahead of the vote. "The proposal before us will create 1.2 million new jobs."

If the two chambers pass different measures, they would have to meet in a conference committee to hammer out differences.

Although the White House had pushed for the elimination of taxes on dividends, officials had in recent days signaled they were willing to work with either the House or Senate version, but were pressing for cuts of at least $550 billion.

After the House vote, the U.S. Chamber of Commerce applauded the move and said tax cuts was one of the best options to stimulate the economy and job growth.

"There aren't many prescriptions left in the medicine bag to heal our economy," said chamber president Thomas Donohue.

"A tax cut that helps spur investment by businesses is one of the smartest ways to achieve long-term growth in the U.S. economy and job market."

The conservative lobby group Citizens for a Sound Economy also praised the House.

"The House bill will bolster economic growth, provide tax relief, and create jobs," said group chairman Dick Armey, a former leading House member.

"While I wish it had more tax relief and a complete repeal of the dividend tax, it is a significant step in the right direction. It's certainly better than the Senate bill which actually raises taxes."

The plan by Senate Republican leaders is some $80 billion over the $350 billion limit that the Senate set for tax cuts in its budget blueprint before the spring recess.

But it did win the support of two key moderate Republicans by raising some taxes to offset the cost of the measure.

Senate Republicans agreed to exempt the first $500 of dividend income from taxed, which would mean a large majority of small shareholders would no longer be taxed.

In addition, taxpayers would be able to avoid taxes on 10 percent of their dividend income and that rate would climb to 20 percent after five years.

Yet another plan unveiled by Senate Democrats on Tuesday proposed a tax cut of $152 billion tax cut over 10 years, but with most of the stimulus coming up front.

Economists have been divided over the tax cut plan, two years after a record $1.3 trillion tax cut was enacted.

"The economy still is looking dicey enough that a little extra fiscal policy insurance at this point might be a good idea," said Chris Varvares, an economist with Macroeconomic Advisers in St. Louis, Missouri.

Others argue that most of the impact would come months or years down the road, with little immediate help.

"I'm worried we're going to end up with something where the near-term help just isn't up to the task and which has some long- term budget costs," said Ed McKelvey, an economist at Goldman Sachs.