NCPA - National Center for Policy Analysis

Cutting Taxes on Dividends Should Raise Value of Companies

January 8, 2003

President Bush's proposal to reduce taxes on corporate dividends is being attacked by Democrats as another give-away to the rich. But not too many years ago it was Democrats who favored this policy and Republicans who opposed it.

Cutting taxes on dividends, as President Bush proposes, should raise the value of companies paying dividends. That is because the tax is now capitalized into the price of stock. Thus lowering the tax is equivalent to an increase in profits.

  • Economist John Rutledge estimates that the complete elimination of taxes on dividends would raise the Standard and Poor's 500 Index of leading corporations' stocks by 8.5 percent or $800 billion.
  • Principal beneficiaries would be companies with high dividend payout rates and low debt.
  • However, as managers alter business strategies by reducing debt and raising equity and dividends, other companies will also benefit.

This estimate is consistent with the experience of New Zealand, which completely abolished double taxation of corporate income in 1988. According to a recent article in the Journal of Business Finance and Accounting, the result was that low-debt firms gained significantly while high-debt firms saw their stock prices fall. However, as time went by, debt levels at New Zealand companies fell across the board.

Relieving the double taxation and over taxation of corporate income. will it increase the economy's long-term growth, and could provide short-run stimulus by boosting the stock market.

Source: Bruce Bartlett (senior fellow), National Center for Policy Analysis, January 8, 2003.


 

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