[Congressional Record (Bound Edition), Volume 149 (2003), Part 10]
[House]
[Pages 13150-13151]
[From the U.S. Government Publishing Office, www.gpo.gov]




                   PRESIDENT BUSH'S TAX CUT PROPOSAL

  (Mr. EMANUEL asked and was given permission to address the House for 
1 minute and to revise and extend his remarks and include extraneous 
material.)
  Mr. EMANUEL. Mr. Speaker, under the new tax cut agreement, some 
investors could cut their tax liability to zero.
  I want to read a few excerpts today from the Wall Street Journal:
  ``After Congress gets through with President Bush's tax cut proposal, 
some rich investors may be able to avoid paying almost any taxes . . . 
''
  `` . . . This relatively simple strategy could become more attractive 
and convenient for wealthy investors because investors could obtain tax 
advantages . . . ''
  These quotes provided by one of our papers, major papers, the Wall 
Street Journal.
  I would like to read the headline: ``Some Investors Could Trim Their 
Tax Bills to Near Zero.''
  It will give rich investors tax advantages that the rest of us do not 
enjoy. So if they are not part of the select elite, they will see their 
taxes, property taxes and others, go up to make up the difference for 
the privileged few. If they do not pay zero this year, they actually 
end up paying taxes. They should know that a tax bill was never 
intended to help them.
  So I would like to submit into the Record the Wall Street Journal 
article and its headline ``Some Investors Could Trim Their Taxes to 
Near Zero.'' Others of us will not be able to have that advantage.

              [From the Wall Street Journal, May 22, 2003]

         Some Investors Could Trim Their Tax Bills to Near Zero

                  (By John D. McKinnon and Ann Davis)

       After Congress gets through with President Bush's tax 
     proposal, some rich investors may be able to avoid paying 
     almost any taxes.
       The latest tax-cut proposal being honed by House and Senate 
     leaders Wednesday night would reduce tax rates for most 
     investors to 15 percent from the current 38.6 percent maximum 
     for dividends; the typical 20 percent for capital gains would 
     also shrink to 15 percent. A Senate plan would go further, 
     allowing taxes on dividends to disappear, at least 
     temporarily.
       Those are juicy breaks by themselves, but some experts 
     warned the potent changes could combine with other existing 
     tax-law provisions--particularly the deductibility of 
     interest on funds borrowed for capital investments--to give 
     some investors very low effective tax rates or even no tax. 
     For example, well-to-do taxpayers could borrow large sums, 
     sheltering much of their income from personal-tax rates that 
     would run as high as 35 percent under the bill, and invest 
     the money in stocks paying dividends that would be taxed at 
     very low rates. (Taxpayers may have to review some other 
     popular investment plans.)
       ``I guarantee it produces very, very low [tax] rates,'' 
     possibly even zero, says Ronald Pearlman, a tax-law professor 
     at Georgetown University.
       The strategy is available not for investors willing to 
     borrow and invest in growth stocks that produce capital-gains 
     income. Deductions are somewhat limited by current tax rules. 
     Still, without changes in the rules, this relatively simple 
     strategy could become more attractive and convenient for 
     wealthy individuals, because investors could obtain tax 
     advantages from investing in dividend-paying stocks as well.
       And experts warned of still-more-complicated games. 
     Officials estimated that for 2003, about $290 billion in 
     capital-gains income and $120 billion in dividends would be 
     subject to the new 15 percent rate. Pamela Olson, the 
     assistant Treasury secretary for tax policy, dismissed many 
     of the concerns as ``hyperventilating'' by congressional 
     critics opposed to the bill.
       Other experts also played down the risk of gaming the new 
     tax rules under the emerging House-Senate compromise. Much of 
     current tax-shelter alchemy involves trying to turn ordinary 
     income like dividends--now taxed at the highest rates--into 
     capital gains, which enjoy a preferential tax rate. 
     Equalizing the rate for dividends and capital gains at 15 
     percent would eliminate much of that gaming and could 
     actually simplifying the tax code somewhat.
       But Ms. Olson said there are specific avoidance schemes 
     that could be of concern in the

[[Page 13151]]

     new system, without citing examples. The Treasury might need 
     broad authority to write rules to prevent abuses, she said. 
     Wednesday, congressional aides were working on language that 
     would deny the tax break for some foreign personal holding 
     companies, which often are located in tax havens. Foreign 
     companies with U.S. shareholders generally were going to get 
     the break, but some further exceptions were possible.
       Another potential loophole, some experts said, would allow 
     shareholders to significantly reduce their capital-gains 
     taxes. That would happen because the proposal as now 
     envisioned wouldn't limit companies to distribute their 
     current earnings. For example, a company might issue new 
     shares as dividends until all its historical earnings and 
     profits are distributed. Under the tax code, shareholders 
     could be able to avoid tax on future cash dividends. This is 
     because dividends are taxable as income only to the extent a 
     company has any accumulated earnings and profits.
       Ms. Olson said she doubted many companies would try such a 
     move because investors would shun firms whose dividend 
     payouts gyrated enormously from year to year.
       ``I just don't see how that would happen in the real 
     world,'' she said. During debate in Congress, the 
     administration embraced a provision that would allow 
     companies to accumulate earnings over several years that 
     could be used to pay out tax-free dividends, but would impose 
     some limit on the fund.
       Meanwhile, many ordinary investors also could realize more 
     garden-variety tax savings, for example by trading in their 
     taxable bonds for tax-advantaged stock. That would also 
     generate a new wave of business for investment banks, whose 
     underwriting business has been moribund.
       ``All manner of preferred stocks will become more popular 
     for the retail investor'' if the plan becomes law, because of 
     their newly tax-advantaged dividends, said Robert Willens, 
     managing director and tax and accounting analyst for Lehman 
     Brothers. And many companies will consider replacing their 
     debt with equity to take advantage of the demand.
       One of the products that could get a boost, he said, is 
     convertible preferred. Another product he expects to see, 
     which he says hasn't been issued recently, is called 
     ``discounted preferred stock.'' It is a product similar to a 
     zero-coupon bond, where an investor buys preferred stock at, 
     say, $25 and can redeem it at $50 after a seven-year 
     maturation period. The difference between the purchase price 
     and the redemption price is treated as dividend income. In 
     the old tax scheme, this wasn't attractive because the 
     ``phantom'' income of $25 had to be taxed on an ``economic 
     accrual basis'' over the seven-year period at high rates. 
     ``But at 15%, it begins to look a lot more attractive,'' he 
     said.

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