The Democratic leadership on Capitol Hill rushed to unite behind President Obama's proposal to pass a one-year tax cut extension for household incomes below $250,000. Rep. Nancy Pelosi and Sen. Chuck Schumer quickly dropped their call for a $1 million threshold for tax cuts, and Senate Democrats are now pushing for a one-year tax cut extension with a $250,000 cut off that could come up for a vote as soon as next week.
But there is one key difference between the Senate Democrats' plan and Obama's: Senate Dems want a tax of 20 percent on dividend income for 2013, according to details of the plan provided by a Senate Democratic aide. That's higher than the current rate of 15 percent under the Bush tax cuts, but it's lower than what would happen if the Bush tax cuts simply expired. Obama, by contrast, allows the Bush tax break on dividends to expire entirely: In his 2013 budget, investment income would be taxed as ordinary income, which means the tax rate could rise as high as 39.6 percent.
When Obama's budget came out, the White House firmly defended letting the Bush dividend tax cut expire, explaining that it would help raise $206.4 billion over 10 years. “We simply can’t afford to devote $206 billion for lower tax rates for the highest-income Americans,” Gene Sperling, White House director of the National Economic Council, explained in February. “Our system for taxing investment income for the most well-off Americans is clearly broken.”
The Senate Democratic plan for a 20 percent tax rate on dividends would roughly cost about $8 billion more than President Obama's proposal to let the tax break expire altogether, estimates Steve Wamhoff, legislative director for the the Citizens for Tax Justice. The Senate Democrats' entire tax extension would cost about $272 billion, according to Democratic aides.
Jared Bernstein, a former White House economic adviser, believes the Senate Democrats' plan is "largely consistent with what the president has been talking about." But he believes their split with the president on the dividend tax cut represents "some compromise," politically speaking.