NCPA - National Center for Policy Analysis

Reducing The After-tax Cost of Capital Raises Revenues

April 17, 2003

The way to get more revenue for the government and reduce the national debt is to bring down tax rates and stop double-taxing saving and investment, says former Housing and Urban Development Secretary Jack Kemp.

The tax cuts proposed by President Bush meet that test:

  • The Congressional Budget Office has said that the president's full tax cut, including the elimination of the double taxation of dividends, would increase investment and speed up economic growth so that the so-called "revenue loss" would be considerably less than the $725 billion usually attributed to it by static analysis.
  • The Heritage Foundation projects that taking the increased economic growth into account, the real revenue loss to the Treasury would be only $274 billion.
  • According to the President's Council of Economic Advisers, eliminating double taxation will encourage businesses to increase capital investment by reducing the cost of capital some 14 percent, which will mean more jobs for more American workers.

The double tax on dividends taxes profits nearly twice as much as if the money were spent or borrowed. A company may deduct the wages it pays employees, the money it pays a vendor for inventory, the rent it pays a landlord or the interest it pays a banker. But when it pays dividends to stockholders, not only may it not deduct the dividend payment from its taxes, the shareholder must also pay income taxes on the dividends. Since interest paid on debt is tax deductible while dividends paid on investment are not, companies have an incentive to borrow rather than raise equity capital.

Source: Jack Kemp, "Time to Eliminate Double Taxation of Dividends,", April 15, 2003.


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