NCPA - National Center for Policy Analysis

The Troubled Dividend Tax Cut

April 30, 2003

After President Bush's tax cut plan was reduced from $726 billion to $550 billion in the House and to $350 billion in the Senate, his proposal to eliminate the double taxation of corporate profits by exempting dividends from taxation appears to be in jeopardy, says Bruce Bartlett.

There has been a lack of support for the dividend plan among corporate executives. This is not surprising, says Bartlett -- in fact, it is a sign that President Bush is on the right track. However, eliminating the tax on dividents would benefit corporations as well as their shareholders:

  • As long as profits are double taxed, executives have a good reason not to pay dividends.
  • But without dividends, shareholders are totally dependent on earnings reports to tell how well their investments are performing.
  • This system is open to abuse by executives needing to hit quarterly earnings targets in order to get stock options.
  • On the other hand, leveling the tax-treatment of dividends would help correct the corporate governance problem evidenced by the Enron, Worldcom and other scandals last year, Bartlett says.

At the same time, continued slow growth in the economy has made the need for short-run stimulus more pressing. The dividend plan was always more tax reform than short-run stimulus. But with full recovery still ahead and a presidential election next year, attention has shifted toward stimulus and away from reform.

Source: Bruce Bartlett, "The Troubled Dividend Tax Cut," April 30, 2003, National Center for Policy Analysis.

 

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