NCPA - National Center for Policy Analysis

Lower Taxes on Dividends Boost Investment, Stock Market

May 4, 2004

As part of the Bush administration's plan to jumpstart the economy, the Job Growth and Taxpayer Relief Reconciliation Act (JGTRRA) of 2003 substantially reduced the individual income tax burden on dividends.

Researchers from the National Bureau of Economic Research (NBER) believe that the plan will have a profound impact on the economy. Specifically, they estimate that:

  • Over the long run, the level of dividends paid out by corporations will surge by 24 percent, amounting to an $86 billion increase from 2002 levels.
  • The reduction of taxes on future dividends will increase the value of the stock market by $690 billion, a 6 percent increase in the market's value in March 2003.

They also suggest that cutting dividend taxes reduces the tax burden on investors who purchase new equity issues in expectation of future dividend payouts; and therefore leads to higher level of investment.

Source: James Poterba, "Taxation and Corporate Payout Policy," National Bureau of Economic Research, Working Paper 10321, February 2004.

For NBER abstract

http://papers.nber.org/papers/W10321

 

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