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Max Baucus Clears One Hurdle on Dividends Tax Rate—Where’s Harry?

Posted By Curtis Dubay On September 22, 2010 @ 2:30 pm In Economics | Comments Disabled

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For the second time in a week, Senate Finance Committee Chairman Max Baucus (D–MT) has called for the suspension of pay-as-you-go (PAYGO) budget rules to pass necessary and vital tax policies. First, Baucus suggested waiving PAYGO as it pertains to the death tax [2]. Now he’s calling for the Senate to rightly ignore PAYGO so it can keep the tax rate on dividends from skyrocketing to almost 40 percent from its current 15 percent level.

The 2001 and 2003 tax relief packages expire at the end of this year. That means marginal income tax rates, the rate on capital gains, and the rate on dividends will revert to their levels prior to passage of the tax relief. The impending tax hike on dividends is often overlooked in discussions about the expiration of the tax relief, but if the rate rises back to 40 percent, the economy will suffer a painful blow [3] and seniors will be hit especially hard [4].

Even Congress overlooked the impact a significantly higher dividends tax rate would have on the economy. There is no other way to explain why it failed to include President Obama’s plan to raise the dividends rate (but keep it equal to the 20 percent capital gains rate) when it exempted from PAYGO requirements the rest of President Obama’s plan to keep tax rates where they’ve been for taxpayers earning less than $250,000 a year.

As a result of this oversight, any Member of Congress who wants to keep the dividends rate at 15 percent, apply President Obama’s plan to raise it 20 percent, or set the rate any level lower than 40 percent must come up with a way to offset the lost revenue. This created a serious hurdle to clear on the way to keeping the dividends rate where it has been for 10 years, since offsets are difficult to find in the current budgetary environment. Raising one tax to keep another from going up makes no sense [5], and the only steps this Congress has taken on spending are to drastically increase it.

Baucus removed this hurdle when he said that PAYGO should be ignored because keeping the dividends rate equal to the capital gains rate is “good policy”—which it is. This is a step in the right direction, but there is more work to do. It would be better for the economy and those currently unemployed for Congress to keep the capital gains and dividends taxes equal and at their current 15 percent rates rather than raise them to 20 percent. Now that Baucus has said that PAYGO should be waived to pass “good policy,” this should be easier for Congress to accomplish.

Baucus’s efforts will all be for naught, however, unless Senate Majority Leader Harry Reid (D–NV) decides to bring a tax bill to the Senate floor. If Reid fails to bring a tax bill to the floor before the election, it will be a clear signal he has no intention of extending any of the tax relief before it expires at the end of the year.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2010/09/22/max-baucus-clears-one-hurdle-on-dividends-tax-rate%e2%80%94where%e2%80%99s-harry/

URLs in this post:

[1] Image: http://www.foundry.org/wp-content/uploads/Baucus_and_Reid100127.jpg

[2] waiving PAYGO as it pertains to the death tax: http://blog.heritage.org../2010/09/16/max-baucus-clears-way-for-death-tax-repeal

[3] economy will suffer a painful blow: http://www.heritage.org/Research/Reports/2010/09/Obama-Tax-Hikes-Dividend-Tax-Increase-Hurts-Seniors-and-the-Economy

[4] seniors will be hit especially hard: http://www.heritage.org/Research/Reports/2010/09/Obama-Tax-Hikes-Higher-Dividend-Taxes-Hurt-Seniors

[5] Raising one tax to keep another from going up makes no sense: http://www.heritage.org/Research/Reports/2010/09/Obama-Tax-Hikes-Defended-by-Myths-and-Straw-Man-Arguments-Summary

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