Bloomberg News

Senate Democrats Split From Obama on Taxing Dividends

July 15, 2012

Senate Democrats are seeking to set the top tax rate on dividends at 23.8 percent, almost 20 percentage points lower than the proposal offered by President Barack Obama in his budget.

That detail, along with a top estate tax rate of 45 percent and a one-year patch to prevent the alternative minimum tax from affecting millions more families, are part of the written version of Senate Democrats’ attempt to extend expiring income tax cuts for one year. The core of the proposal would extend the George W. Bush-era cuts through 2013 for 98 percent of households while letting them expire on income above $200,000 for individuals and above $250,000 for married couples.

A Senate Democratic aide, who spoke on condition of anonymity, confirmed the details. Senate Majority Leader Harry Reid, a Nevada Democrat, said last week that the Senate will vote before the August recess.

Obama has made his push for a tax-cut extension for all but the highest-income families a central theme in his presidential campaign last week. He has been asking Congress to send him the plan for his signature as soon as possible.

“Let’s skip the unnecessary drama, the needless delays and all the partisan posturing and let’s just do the right thing for the people who sent us here to serve,” Democrat Obama said in his weekly radio and internet address.

Aside from the lack of bipartisan support preventing action, until now there hasn’t been a version of Obama’s plan in legislative form.

Counting Votes

When asked about his ability to get a majority of the Senate to support Obama’s plan, Reid expressed confidence.

“One of the things I’m pretty good at around here is counting votes, so I don’t think anybody has to worry about that,” he said July 12.

Democrats control 53 votes in the 100-seat Senate, and Republicans oppose the Democrats’ plan because it doesn’t extend all of the expiring tax cuts. High-income taxpayers, they note, often pay taxes on their business income on their individual returns.

Two members of Reid’s caucus, Jim Webb, a Virginia Democrat, and Joe Lieberman, a Connecticut Independent who caucuses with Democrats, have said publicly they will oppose the measure, meaning nearly all of the rest of the chamber’s Democrats would have to support the bill if it is to garner a majority vote.

Senator Jon Tester, a Montana Democrat who is in a tough re-election race this year, will support the bill, Tester’s spokeswoman, Andrea Helling, said in an e-mail. Missouri Senator Claire McCaskill, another Democrat in a difficult race this year, has said she supports Obama’s tax plan.

Raising Taxes

“Raising taxes on job creators during a jobs shortage makes about as much sense as cutting off the water supply during a drought,” Senator Rob Portman of Ohio said in the weekly Republican address.

If Congress doesn’t act, tax rates on ordinary income, capital gains, dividends and estates would all increase in 2013. The potential changes are part of the $607 billion so-called fiscal cliff of automatic spending cuts and tax increases that the Congressional Budget Office has warned could push the country into a recession.

The proposed bill would set the basic top rate at 20 percent for both capital gains and dividends. The 2010 health care law included an additional 3.8 percent tax, yielding the 23.8 percent rate. In his 2013 budget, Obama called for taxing dividends as ordinary income, subjecting them to a top rate of 39.6 percent and the 3.8 percent surcharge for a 43.4 percent total.

Obama’s previous budgets had included the 20 percent rate on dividends.

Estate Tax

On the estate tax, the Democratic proposal would set a $3.5 million per-person exemption and a 45 percent top rate, the same proposal Obama had made in his budget. That’s less generous to estates and heirs than the current rules, which have a $5.12 million exemption and a 35 percent top rate.

In 2010, Obama signed a law that extended the income tax cuts and set the estate tax at the current levels.

The change back to the estate tax rules that had been in effect in 2009 would increase the number of taxable estate tax returns to at least 7,000 from 4,000 in 2013, according to the Tax Policy Center, a nonpartisan research group in Washington.

The alternative minimum tax is a parallel tax system that was originally designed to prevent high-income taxpayers from using legal deductions and credits to eliminate their tax liability. The exemption in that system isn’t indexed for inflation. If Congress does nothing, the AMT would affect 31.2 million households in 2012, up from 4.3 million in 2011.

The Democrats’ bill would limit the AMT’s reach for the 2012 tax year. It wouldn’t affect the 2013 tax year.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net


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