NCPA - National Center for Policy Analysis

Negotiating the Dividend Tax Cut

May 2, 2003

President Bush's sweeping plan to eliminate most individual taxes on dividends and capital gains may be dead in the water, sunk by congressional deficit fears and a desire to emphasize immediate stimulus over long-range tax reform. But the White House remains committed to pushing a scaled-down version of the dividend break, insisting it would boost the stock market and the economy, says Howard Gleckman.

While it's clear that the President will have to accept some compromise on dividends, he's fighting for the most generous proposal he can get, according to Gleckman. That's got both lawmakers and economists scrambling for the best way to trim it.

The four main alternatives being considered, and their benefits, include:

1. The 50 Percent Solution, which excludes half of dividends and capital gains from individual taxes.

  • Treats all investment income similarly, simplifying taxes on gains.
  • Costs more than $270 billion over 10 years.

2. The Phased-In Approach, which gradually eliminates dividend taxes over 10 years.

  • Eases short-term budget-crunch and would allow backers to accelerate tax cut if deficit shrinks.
  • Provides little stimulus and masks long-term budget impact.

3. The Two-For-One Rate, which taxes both dividends and capital gains at 18 percent.

  • Dividends become more attractive, relative to capital gains.
  • Makes taxes more complicated and would cost $230 billion-plus over 10 years.

4. The Cheap and Easy Plan, which excludes $1,000 in both dividends and capital gains.

  • Reduces filing paperwork and a manageable cost of $3 billion a year.
  • Does little to boost either the economy or the stock market.

Source: Howard Gleckman, "The Dividend Tax Cut: Prepare for a Paler Version:

Scaled-back alternatives are ricocheting around Washington," BusinessWeek, May 5, 2003.

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