'Half-a-Loaf' Bush Tax Cut Could Be Good

By Christine Hall | July 7, 2008 | 8:29 PM EDT

(CNSNews.com) - Congress is back from spring recess this week, but there's no sign yet that Republican moderates in the Senate will consent to increasing President Bush's tax cut above the $350 billion mark.

That's less than half of the original $726 billion, 10-year dividend tax cut and still well below the House-passed $550 billion.

If Republicans Chuck Grassley (Iowa), George Voinovich (Ohio), Olympia Snowe (Maine), John McCain (Ariz.) and Lincoln Chafee (R.I.) continue to rebuff anything above $350 billion and Democrats like John Breaux (La.) don't have a change of heart, tax cut proponents are sure to be disappointed.

But some analysts say half a loaf is better than nothing - as long as it's the right kind of tax relief to stimulate the economy.

"I think the difference between taxing dividends at 35 percent and taxing them at 20 percent is quite substantial," said the Cato Institute's Alan Reynolds. "And if that's all we get, let's take it.

"Taxing dividends at a rate similar to or the same as capital gains removes a lot of distortions in the way corporations retain earnings," Reynolds explained. Under the current system, which taxes dividend income twice (once when it's earned by corporations and again when it's paid out to investors), companies have incentives to get deeply into debt to avoid the double tax, he said.

Worse than a mere $350 billion dividend tax cut is the "wrong" kind of tax cut or a slow phasing in of cuts in the dividend tax or income tax rates, according to Reynolds and the Heritage Foundation's Dan Mitchell.

"Not all tax cuts are created equal," said Mitchell. "The wrong kind will do little to boost economic growth and create jobs."

Namely, the child tax credit, the marriage penalty relief, the new 10 percent tax bracket - along with any sort of tax rebate - won't help grow the economy, says Reynolds.

He also fears "potentially troublesome" news that the White House is considering a slow phase-in for the dividend tax cut in order to win support for a higher tax cut and to make it appear less costly to the treasury balance sheet.

"I think that's the worst idea out there," Reynolds declared. "It would defer all the good things from reducing dividend taxes. I don't want dividends now if you're going to tax them at a lower rate 10 years from now."

A spokesman for Senate Majority Leader Bill Frist (R-Tenn.) said everyone is in a "wait-and-see" mode to watch the debate unfold. Frist will work to get the largest possible jobs and tax package out of the Congress, said the spokesman.

Some tax cut proponents hope that the House will be able to negotiate a higher tax cut once it reaches the House-Senate conference committee.

A spokesman for Chafee, Stephen Hourahan, affirmed the senator's commitment to opposing higher tax cuts.

"The senator voted with Senator McCain against the final budget with the $350 [billion] in it, so he is against anything," said Hourahan. "He [originally] voted for the $350 [billion] as a compromise to bring it down from $726 [billion]. He's not for a tax cut at all.

"The deficits are much more important to deal with and to spend properly than to deal with a tax cut," said Hourahan.

The Senate finance committee is scheduled to work on the tax bills this week, mark it up the following week, then be debated on the Senate floor and sent to conference committee.

E-mail a news tip to Christine Hall.

Send a Letter to the Editor about this article.