Would Eliminating the Tax on Dividends Lift the Economy?
By: Source: AARP Bulletin Today Date Posted: 2003-09-03 13:50:00-04:00
Yes Plan Would Spur Long-Term Growth
By David C. John
Recent statistics showing that the economy grew at an annual rate of only 0.7 percent last quarter reinforce the perception that the American economy needs a boost. Luckily, by encouraging investment and savings, President Bush's proposal to eliminate the double taxation of dividends would provide just what is needed.
The dividend tax change would create an average of 512,000 jobs each year while increasing the gross domestic product by an average of $79 billion annually, according to the Heritage Foundation's Center for Data Analysis (CDA).
What is most important is that this plan would promote permanent growth while temporary tax rebates and similar ideas would have all the staying power of burning paper.
An often-overlooked benefit of this economic growth would be additional payments into the Social Security trust fund. The CDA estimates that the dividend tax plan would increase payments to the trust fund by $100 billion over the next 10 years. This would make it easier for the program to pay benefits, even if it is not enough to solve Social Security's problems.
Economic growth benefits everyone, from young workers who can more easily find a job to retirees whose investments grow. About 84 million Americans own stock either directly or through various retirement plans. They would see the value of their stock rise, even stock that was part of a tax-deferred retirement plan.
Just as important, the dividend tax plan would promote dividend payments to shareholders. Forty years ago, 60 percent of corporate profits went to shareholders as dividends. Today that number has dropped by half.
My grandmother lived on Social Security and the dividends from a small amount of telephone stock. She never had to worry about the stock market's rises and falls. All she needed was her regular dividend payments.
David C. John is a research fellow at the Heritage Foundation, a Washington, D.C., public policy institute.
No This Tax Proposal 'Is a Clear Loser'
By Marilyn Moon
Eliminating the dividend tax is essentially a proposal in search of a justification. The arguments raised in support of it are flawed or erroneous.
The tax cut initially was sold as a stimulus to the economy. When experts noted that it would do no such thing, the claim was changed to job creation. Again, however, independent analysts note that there are other, better ways to promote economic growth.
Another argument is to reduce double taxation of dividends. But almost all income is subject to double taxation. My wages are taxed through payroll taxes and income taxes at both the state and federal level—a much bigger source of double taxation than dividends.
And certainly on grounds of fairness, the dividend tax cut is a clear loser. Although older persons are somewhat more likely to have dividends than the young, the benefits would still be distributed unevenly for people over age 65. For example, while two-thirds of seniors have incomes of less than $50,000, just 4 percent of the dividend tax cut would go to them. For instance, someone with income between $30,000 and $40,000 a year will get about a $29 tax cut each year as compared to the $27,700 average cut for a person with an income above $1 million. And this would be added to earlier tax cuts that also disproportionately help the rich.
Over 10 years, this tax cut will reduce federal revenues by $364 billion—money that could be used for a variety of other projects. Before it's enacted, this cut ought to be shown to rank higher on the list of national priorities than a Medicare prescription drug benefit, reduction of the federal deficit (which essentially passes costs on to future generations), improvements in education, health coverage for the uninsured, homeland security or even other tax reductions. A dividend tax cut will make it harder to do all these other things.
The stakes are simply too high to accept bad policy on the grounds that "any tax cut is a good idea."
Marilyn Moon is a senior fellow at the Urban Institute, a Washington, D.C., public policy research organization.
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