Bush firm on keeping investment tax cuts

WASHINGTON - President George W. Bush's 2006 Budget request will call for making permanent a cut on dividends and capital gains taxes, Administration and industry officials say.

The request would be part of the Budget submission to Congress scheduled for release on February 7, a Bush Administration official said on condition of anonymity, because the details are not supposed to be disclosed before that date.

The two tax cuts will cost the Government US$119 billion ($170 billion) between 2003 and 2008, according to the nonpartisan Congressional Budget Office.

Making the tax cuts permanent may spark a battle in Congress, which will likely consider a proposal from the Bush Administration this year to set up Social Security personal savings accounts that the budget office said might add up to $2 trillion to the deficit in the first 10 years.

"His math is going to be very difficult in terms of making everything work," said Representative Bill Thomas of California, chairman of the tax-writing house ways and means committee.

The 2003 law that reduced the two taxes was a compromise for Bush, who asked that the dividend tax be eliminated. The cuts, part of a larger $350 billion tax package, passed a deadlocked Senate after Vice-President Dick Cheney cast a tie-breaking vote.

At the time, Senator Kent Conrad, a North Dakota Democrat, said the cuts were "looting the Social Security trust fund of almost every single dime".

The cuts lowered the capital gains tax on investments held more than one year from 20 per cent to 15 per cent, and reduced taxes on dividends from as high as 38 per cent to 15 per cent. "It's been a central part of his theme, the jewel of Bush's tax cuts," said Stephen Moore, president of the Washington-based Free Enterprise Fund, a tax-cut lobby group. "Bush feels that it's the most pro-growth element" of making tax cuts permanent.

Bush and Treasury Secretary John Snow have both called for making the tax cuts permanent.

The Bush Administration's five-year economic forecast, released last month, assumes the tax cuts will be permanent.

A spokesman for the White House Office of Management and Budget, Chad Kolton, declined to comment. Kolton pointed out that Bush's Budget last year sought extensions of tax cuts. "We did propose last year to make permanent all tax relief because that's an effective way to support economic growth," he said.

Making the cuts permanent was the top legislative goal of the Securities Industry Association, whose almost 600 members include Goldman Sachs, said Richard Hunt, senior vice-president for federal policy for the Washington-based trade group. Investors wanted to know how things would be in five years.

- BLOOMBERG