*EPF519 05/16/2003
Senate Narrowly Passes $350,000 Million Economic Stimulus Bill
(Measure would suspend dividend tax, give tax breaks to multinationals) (810)

By Andrzej Zwaniecki
Washington File Staff Writer

Washington -- The Senate has passed an economic stimulus bill that would temporarily repeal all stock dividend taxes and give multinational corporations a tax break on foreign-earned profits.

The legislation, which passed 51-49, would scale down the $726,000 million tax cut package originally requested by President Bush to $350,000 million spread over 11 years. But the measure would keep, for a limited time, the centerpiece of Bush's proposal -- elimination of taxes on stock dividends.

The House of Representatives passed its version of a job and growth bill on May 9. Now negotiators from both chambers must reconcile differences between the two bills and write compromise legislation.

Under the Senate bill, 50 percent of all stock dividends paid by U.S.-based corporations would be tax free in 2003, and then 100 percent from 2004 through 2006. The tax repeal would expire in 2007 when a tax on dividends would be restored to the previous levels with a top rate of 35 percent, according to news reports.

President Bush praised the Senate for passage of the bill with the dividend tax repeal.

"By including a measure to completely abolish the double taxation of dividends, the Senate has demonstrated that they are committed to creating as many jobs as possible for American workers," Bush said.

The president sought the complete elimination for 10 years of the taxes stockholders pay on dividends with a view of making the cut permanent.

Democrats in the Senate argued, however, that the elimination of taxes on stock dividends would help mostly the rich and increase the budget deficit. They said that the plan pushed by Republicans to suspend these taxes rather than eliminate them amount to a "gimmick."

A provision in an early draft of the bill would have limited the tax break to dividends paid by U.S. companies. It was dropped before the bill could reach the Senate floor after it had met strong opposition from groups representing U.S. subsidiaries of foreign-owned companies, according to news reports.

The tax act passed May 9 by the House of Representatives would cut the maximum tax on both dividends and capital gains to 15 percent through 2012 but would not extend the benefits to dividends from foreign-owned companies.

However, House Ways and Means Committee Chairman Bill Thomas, Republican from California, promised to seek a solution that would provide an "opportunity for foreign" companies when negotiators from both chambers start working on a compromise measure.

The Senate legislation also would offer for one year a tax break to multinational companies allowing them to repatriate to the United States profits earned abroad at a rate reduced from the current 35 percent to 5.25 percent. Supporters of the provision said it would help the U.S. economy by bringing to the United States sizeable funds, which could boost business investment. There is no similar provision in the House version of the bill.

Currently, these earnings are taxed at rates -- usually lower than U.S. rates -- set by the host country. U.S. taxes are imposed on foreign-earned profits when the earnings are repatriated to the United States to bring the total tax up to the U.S. rate.

Overall, the Senate bill calls for more than $440,000 million in new tax cuts. But to stay within the $350,000 million limit imposed by the Senate due to budgetary concerns, the bill would offset more than $90,000 million of its costs by abolishing some tax benefits, including the elimination of tax breaks for Americans working overseas. An amendment to remove the relevant provision from the bill was rejected, but senators indicated that the benefit could be restored during negotiations with the House on a final compromise bill.

The existing law lets U.S. workers abroad exempt $80,000 of their income from taxation.

Other provisions of the Senate bill include increasing a small-business expensing limit, accelerating planned income tax cuts, increasing the child tax credit as well as tax breaks for married couples and aid for states. With the exception of state aid, these cuts have been sought by the president and correspond to similar reductions in the House version of the bill, which in some instances calls for different tax schedules or rates or both.

President Bush said he would work with the full Congress to pass a "robust economic growth plan."

"I call on Congress to resolve their differences quickly so I can sign a bill that will help create jobs, boost take home pay and spur economic growth," he said.

For the bill to become law it must be passed by both the Senate and House and signed by the president.

(The Washington File is a product of the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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