Dividend Tax Cut - Essay Example

In 2003 United s President George W. Bush asserted that it would be beneficial to stop the double taxation of dividend payments made by companies to their shareholders. This idea argued that "while it's fair to tax a company's profits, it's not fair to double-tax by taxing the shareholder on the same profits (Lacoude 18). Since these shareholders are not wholly responsible for the profits of the company, Bush found that the taxing of their contributions was unfair and unnecessary. With this new plan "investors holding shares of public and private corporations would be able to claim a high dividend tax credit that would roughly match the corporate income tax levied on profits prior to their distribution" (Mintz 108). It was believed that in doing this, the overall U.S. economy would profit because investors would be encouraged and more open to invest in companies. "The tax-cut package enacted in 2003 reduced to 15 percent the top tax rate on long-term capital gains and corporate dividends" (Mintz 108). While this is a significant decrease, many citizens were led astray as to who would actually be benefiting from the package because the Bush administration pointed out that almost half of all American households held some form of stock. "What this statistic ignores, however, is that nearly two-fifths of this stock is held in retirement accounts, such as 401(k)s and IRAs. This distinction is crucial, because capital gains and dividend income accruing inside these retirement accounts is not subject to taxation, and thus would not receive a tax benefit from the reduction in the tax rates on capital gains and dividend income" (Amromin 38). Therefore, the actual amount of citizens benefiting from this plan is significantly lower than what the American public was led to believe. Only the wealthiest of stock holders benefit from dividend income. According to the Tax Policy Center fifty four percent of all dividend income goes to households who make over one million dollars per year and the remaining goes to households that make over two hundred thousand. When looking at the big picture, these households only make up three percent of the country's population. "In contrast, only 11 percent of capital gains and dividend income goes to the 86 percent of households with incomes of less than $100,000. Only 4 percent of this income flows to the 64 percent of households that have income of less than $50,000" (Amromin 39). While this information proves that the wealthy are benefiting from the dividend tax cuts, the remaining majority if the population continues to pay a tax on their dividends. Another negative side affect to the passing of this tax cut package are the affects it will have on different private bond companies and charity organizations. "The stock dividend exclusion will hurt municipal and state bonds, it will reduce the attractiveness of the Low Income Housing Tax Credit amounting to 40,000 affordable housing units lost, and it will harm the marketability of the Historic Preservation Tax Credit, the New Markets Tax Credit and mortgage revenue bonds" (Cohen). In financially strapped cities throughout the country, many are turning to philanthropic foundations to substitute for the loss of government funds. "Many charities believe that the plan for the stock dividend exclusion is bad public policy in terms of equity and fairness in our tax system, and bad for charity and philanthropy" (Cohen). As for the corporations themselves, economic studies have shown that a decrease in taxes does not ultimately play any kind of role in whether corporations decide to pay out higher dividends. Many citizens are concerned that instead of issuing dividends to their shareholders, corporations will substitute "dividend payments for share repurchases, an alternative method of payout that boosts the price of the company's stock for shareholders" (Friedman). Like these "share repurchases", many companies who say they have undertaken the dividend policies have morphed them into one time offers, or special dividends that can make it difficult to calculate just how effective the long term benefits of the tax cuts will be to the economy. If this is true, then the entire dividend tax cut package would be having an opposite effect to what the government was hoping for. Only strengthening these worries is a study done by the National Bureau of Economic Research which cited that about half of all companies that have been affected by the tax cut package have not increased their total pay out to their shareholders at all. Overall, the high cost of the dividend tax cut policy adds significantly to the country's deficit. Even if the policies were to work properly, their long term effects would be more detrimental to the economy than they are worth. With the government continually borrowing money to finance the corporations and the corporations not significantly changing the way they pay their shareholders, the pool of savings valuable for investment shrinks. These tax cuts are unlikely to boost the economy in any way in the long run, and if anything will only lower future incomes for American citizens. "The Joint Committee on Taxation estimates that the dividend and capital gains tax cuts, which are scheduled to be in effect through 2008, will cost $148 billion. Making these tax cuts permanent would reduce revenues by an additional $148 billion through 2015, according to Congressional Budget Office estimates. Because this lost revenue increases the deficit, an additional $110 billion in costs will be incurred through 2015 for higher interest payments on the debt. In total, these tax cuts, if extended, thus would add $405 billion to the debt from the time they were enacted in 2003 through 2015" (Friedman). In the end, it is understandable as to why President Bush would have at first embraced the dividend tax cut package as something that would be beneficial top the economy. At first look, it seems to be a very good idea, but upon further research and investigation it can be concluded that this policy doesn't work the way it is supposed to. The end result is that it makes the wealthy even more wealthy making it more difficult for everyday citizens to buy stock, and will detrimentally effect the economy in the long run as the deficit continues to grow. Works Cited 1.) Amromin, Gene. How Did the Dividend Tax Cut Affect Stock Prices. Center on Budget and Policy Priorities. Oct. 2005. 2.) Cohen, Rick. Dividend Tax Cut Offers Few Benefits; Would Hurt Bonds, Charities. Pheonix Business Journal. Mar. 2003. 3.) Friedman, Joel. Dividend and Capital Gains Tax Cuts Unlikely to Yield Touted Economic Gains. Center on Budget and Policy Priorities. Oct. 2005. 4.) Lacoude, Philippe. Better Than a Bailout. Reason. Jan 2009. Vol. 40. Issue 8. 15-29. 5.) Mintz, Jack. What It Means for Investors. Canadian Business Journal. Jan 2006. Vol. 79. Issue 3. 102-109. Read More