Posted by John Irons at May 16, 2003 08:06 AM

The Senate republican tax plan, which passed yesterday, will phase-in a dividend tax cut, and then repeal it after three years.

The Senate plan calls for the dividend tax will be cut by 50% this year, and fully eliminated for 2004, 2005, 2006 and then reinstated for 2007 and beyond.

The sole reason for this gimmick is to reduce the cost below the previously agreed $350 billion, and hence to make the bill filibuster-proof. The true cost of the permanent tax reform is thus much greater than $350 billion.

The additional problem is that the phase in is terrible economics. As a company, will you pay out dividends this year, when they will be taxed at 50%, or next year, when they will not be taxed at all?

The likely result is a large reduction in dividends this year - exactly when we need economic stimulus.

Senate Approves Tax Cut Proposal (washingtonpost.com)

The Senate bill actually is more generous to corporations and investors than either the House-approved tax cut package or the president's original proposal -- at least until 2007. It would exclude half of all dividend income from taxes this year, then would shield all dividends from taxes until 2007, when the tax cut disappears altogether.