The U.S. Senate's support Thursday for a tax relief package that temporarily repeals the burdensome double taxation on dividends is a start, but more is expected in the future.
Many free-market economists point to the dividend provision as the single most important tax relief item to free capital investment for job creation and economic growth. In addition, an estimated 9.8 million senior citizens hold dividend-producing investments in their retirement portfolios and would greatly benefit.
In recent days, elimination of the dividend tax — a cornerstone of President Bush's original $726 billion tax cut package — was thought to be a lost cause in the Congressional shuffling to meet tax relief targets.
But Senate Republican leaders undertook some last-minute maneuvering through budget accounting rules to craft a proposal that would shave the tax in half this year and then eliminate it through 2007. The provision, along with other tax changes, would be temporary, requiring Congress to make the cuts permanent before they sunset.
The Senate's $350 billion package must now be reconciled with the $550 billion 10-year tax relief plan passed by the House.
The double taxation of dividends is among the most onerous in the tax code as it limits capital formation and penalizes savers and investors. Dividends are essentially taxed twice, first as corporate profits and then as distributions to shareholders from investments.
The Bush administration has promised to press for permanent repeal of the dividend tax, which would place politicians on the hot seat in the future.
While it would be preferable to see the dividend tax repealed permanently, passing the current phased-out proposal into law would give the economy a needed boost and provide tax cutters with more ammunition to fight another day.