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Dividend Tax Cut - Essay Example

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In 2003 United States 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)…
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Dividend Tax Cut
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Download file to see previous pages 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 ...Download file to see next pagesRead More
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