NCPA - National Center for Policy Analysis

Benefits of Cutting Taxes on Dividends and Capital Gains

May 9, 2003

A tax-cut compromise proposed by Rep. Bill Thomas (R-Calif.), chairman of the House Ways and Means Committee, would lower both the individual tax rate on dividends and the tax rate for long-term-capital gains.

Bruce Bartlett -- who initially counseled "abandonment" of dividend tax relief because of the $350 billion cap some senators threaten to impose on the overall size of the tax relief bill -- supports the Thomas plan. Economist Alan Reynolds says there is plenty of room under the cap to lower individual rates and lower the tax on dividends:

  • The Urban Institute and Brookings Institution estimated that taxing dividends at the same rate as long-term capital gains (which is 18 percent on assets held five years) would cost only $78.3 billion from 2003 to 2012.
  • The Ways and Means Committee estimates that speeding up the already enacted cut in the top four individual tax rates to the 25 percent to 35 percent range would cost only $74 billion.
  • So the total cost of these two reforms is about $152 billion -- or $15 billion a year -- in federal revenue.

Furthermore, that leaves $198 billion to lower both the tax on gains and dividends to the same 15 percent rate. Thomas' plan includes a super-low 5 percent tax rate for low-income taxpayers. Although the revenues lost by reducing the tax on dividends to the 5-to-15 percent range would supposedly amount to $245.8 billion, the lower rate would actually encourage more people to keep dividend-paying stocks in taxable accounts.

The Thomas plan adds to the pro-growth elements of President Bush's proposals, while remaining below $550 billion, even including nongrowth measures like accelerating the child tax credit.

Source: Alan Reynolds (Cato Institute), Viewpoint, "Want Pro-Growth Tax Cuts? Try Dividends and Capital Gains," Investor's Business Daily, May 9, 2003.


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