Senate Democrats temper Obama plan on dividends taxes

WASHINGTON Tue Jul 17, 2012 4:13am IST

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WASHINGTON (Reuters) - A plan by Senate Democrats to let income tax rates rise for wealthier Americans takes a softer line on taxing dividends than President Barack Obama's proposal, easing the tax load on the rich.

The draft plan, circulating among lobbyists and confirmed by Senate Democrats, mostly embodies Obama's proposal to extend lower tax rates for households earning up to $250,000 a year when the so-called Bush-era tax cuts expire at the end of 2012, while ending the cuts for higher incomes.

But with the plan, dividends would be taxed at half the rate proposed by the Democratic president.

Obama's 2013 budget proposed bringing tax rates for dividends up to those for ordinary income, which would result in a tax rate of about 40 percent for the highest-income groups.

Senate Democrats' plan would raise dividend taxes from the current 15 percent rate to 20 percent, according to a summary.

The plan comes amid an intense lobbying push, with dividend-paying companies like Verizon Communications, United Parcel Service and Southern Company among those pressing their case with influential lawmakers in recent months.

Chief executives from shareholder-owned electric companies, including Southern, Xcel Energy and NextEra Energy, are making the rounds with lawmakers in Washington this week.

The Democratic-controlled Senate will vote on the legislation within weeks, accelerating a partisan battle over tax rates ahead of the November 6 presidential and congressional elections. Obama highlighted the issue last week, pitching a tax fairness theme to draw a contrast with Republicans.

"Many members of the other party believe that prosperity comes from the top down, so that if we spend trillions more on tax cuts for the wealthiest Americans, that will somehow unleash jobs and economic growth," Obama said last week.

The Democratic proposal will hit a roadblock in the House of Representatives, where Republicans in control favor extending all of the lower tax rates, including to the higher income groups.

STICKIER TAX ISSUES

Lower tax rates on income and investments enacted under Republican president George W. Bush in 2001 and 2003 will expire at the end of the year unless Congress takes action. Obama agreed to extend all the rates in 2010 for two years.

Sean West, an analyst for investors at Eurasia Group, said most Democrats - including Obama - want to put off the stickier tax issues until next year when they attempt to overhaul the tax code.

"Congress is going to get a stop-gap solution and the dividends are going to catch a ride," West said.

West pointed out that when Obama made his pitch last week, he backed only a one-year extension.

At the same time, rhetoric from both sides is heating up, with some lawmakers suggesting they would let all tax rates rise if they do not get their way.

On top of individual income and dividend tax rates, lower rates on the capital gains and estate taxes will also end on December 31 if lawmakers take no action.

The Democratic proposal mirrors Obama on these issues. It would raise the capital gains tax to 20 percent from 15 percent for top earners, and boost the estate tax to 45 percent from 35 percent.

Lawmakers are not expected to move on these tax issues until after the elections. This looming deadline, along with pending automatic spending cuts and a potential for the government to hit its borrowing limit, has been dubbed the "fiscal cliff."

Non-partisan congressional budget-scorers say doing nothing could push the U.S. economy back into a recession in the first half of next year.

"It is crazy to think that they actually would go off the edge," West said.

(Reporting by Kim Dixon; Editing by Fred Barbash and Vicki Allen)