NCPA - National Center for Policy Analysis


August 27, 2004

Making the Job Growth and Taxpayer Relief Reconciliation Act of 2003 permanent makes sense, says Bruce Bartlett. Since becoming law in May 2003, the tax cut not only reduced the burden on individuals, it also reduced the cost of capital to corporations. The economic benefits of the lower dividend tax rates will increase over time, and they will be even greater if Congress makes the rate cuts permanent -- and greater still, if the taxation of dividends is completely eliminated.

The Bush administration's lower tax rates on dividends have encouraged companies to raise money by selling more shares rather than by borrowing. According to the American Shareholders Association, in the first 12 months of lower rates (May 2003 to May 2004):

  • There were 298 announcements of initial or increased dividend payments by firms in Standard & Poor's index of 500 largest corporations, compared with just 192 in the preceding year.
  • Net individual dividend income from these firms increased 50 percent in 2003, from $32.7 billion to $49.1 billion, and is projected to total $55.5 billion in 2004.

Over time, according to the National Bureau of Economic Research:

  • The level of dividends paid out by corporations will rise 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 over the market's value as of March 2003.

Dividend tax relief was exactly what this country needed to pull itself out of the recession. The positive effects of the Bush tax cuts are just beginning to be seen. If made permanent, their positive benefits could be even more substantial than currently predicted, says Bartlett.

Source: Bruce Bartlett, "Benefits of the Bush Dividend Tax Cut," Brief Analysis No. 483, National Center for Policy Analysis, August 27, 2004.

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