House OKs $550 billion tax cut on wages and capital gains

WASHINGTON -- The Republican-led House approved a $550 billion tax cut package on Friday that would trim levies on wages, capital gains and some business investments but give President Bush a smaller reduction than he wanted on corporate dividend taxes.

Bush praised the House after a nearly party-line 222-203 vote for "making great progress" toward approving a package that he said would boost economic growth and create jobs. He said the House version included all the elements of his original plan but he looked forward to "building on this success" as the bill moves forward.

The administration said it would press Congress for the total elimination of taxes on stock dividends. The Senate planned to take up an even smaller package of tax cuts next week.

"Support this bill and support job creation in this country," said House Speaker Dennis Hastert, R-Ill., echoing the White House's pitch that new tax cuts can best stimulate a tottering economy.

Democrats said the big tax cuts would deepen budget deficits already approaching record levels and spark little economic growth. "In two years, President Bush and Republicans in Congress have presided over the most dramatic deterioration in our economic health in our nation's history," said House Minority Leader Nancy Pelosi, D-Calif.

While Bush had made eliminating dividend taxes for stockholders the centerpiece of his call for $726 billion in tax cuts, the House opted instead to cut the top tax rate on dividends to 15 percent from 38.6 percent. The top tax rate on capital gains would fall to 15 percent from 20 percent. Low-income earners would pay a 5 percent tax on both types of investment income.

To prime the economy, the bill would let small businesses write off up to $100,000 annually in new equipment investments for five years, compared with the $25,000 write-off now allowed, and raise families' child tax credit from $600 to $1,000 for the next three years.

The new cuts would total $550 billion through 2013. They are in addition to the $1.35 trillion Bush won from Congress two years ago.

The Senate begins debate Monday on its $350 billion economic growth proposal, which includes $20 billion in new aid to states. It combines $421 billion in new tax cuts and $20 billion state aid, and it raises taxes and fees $91 billion over the coming decade to offset the added cost to the Treasury.

House Republicans said they would reject tax increases written in the Senate, singling out one on Americans who work abroad beginning in 2004 that would raise $35 billion. Those workers would no longer be able to exempt the first $80,000 of income earned abroad from U.S. taxes.

'One radical way'

House Republicans said they would look at Senate provisions that raise money by closing corporate tax shelters, such as those uncovered during recent accounting investigations, if they didn't retroactively punish companies acting legally at the time.

"There is one radical way to make President Bush's growth package fit, and that's try cutting spending," said Rep. Mark Foley, R-Fla.

Republicans blocked debate over a Democratic economic plan that would give parents an $800 refundable child tax credit and permit small businesses to write off $75,000 in new equipment purchases. To help unemployed workers, Democrats would extend jobless benefits and give companies a tax credit for hiring anyone unemployed for six months or more.

Democrats also want to give states $18 billion for Medicaid and $26 billion for homeland security, education and other needs. Their tax and spending plan would be paid for over the coming decade by freezing the two highest income tax brackets in place and closing corporate tax shelters.

Democrats complained bitterly that they could not debate their alternative plan. "We can have democracy in Iraq, but not here on the House floor," said Rep. Eliot Engel, D-N.Y.

The legislation written by Senate tax writers contains the same basic elements as the bill passed in the House, including cuts to income tax rates. The Senate bill would give parents a $1,000 refundable child tax credit and expand the standard deduction for married couples. Small businesses could expense up to $75,000 in new equipment purchases.

The Senate bill would make the first $500 in dividend income tax free. Shareholders with additional dividend income could exclude an extra 10 percent from taxes through 2007 and an additional 20 percent from 2008 through 2012.