NCPA - National Center for Policy Analysis

Tax-rate Cuts For Dividends Would Boost Economy and Stocks

December 4, 2002

White House economic advisers are said to be seriously considering cutting rates on taxes paid on stock dividends, although President Bush has not yet committed himself to the plan. Of all the suggestions for increasing economic activity through changes in tax policy, economists believe lowering dividend tax rates would give "the most bang for the buck," according to reports.

  • Dividend-tax reductions would make stocks more attractive and could boost overall stock prices by 20 percent -- although the market may already reflect part of that gain.
  • According to a White House study, the change would boost economic activity sufficiently to allow the government to recoup 40 percent to 50 percent of the cost through increased tax payments.
  • Since dividends become part of an investor's income and are subject to income tax, wealthy investors pay high rates on dividends than they would on capital gains.
  • Also, dividends are effectively taxed twice -- first, when the company pays taxes on its earnings; and again, when shareholders are hit by taxes on the dividends they collect.

Because of this quirk in the tax laws, corporations in recent years have focused less on dividend payouts and more on boosting stock prices. The pressure to show regular stock-market gains may have contributed to the corporate accounting scandals, some economists believe.

If approved, the plan could prompt changes at some big high-tech companies that have often resisted paying dividends. For example, shareholders of Cisco Systems recently voted down a proposal to require its leadership to consider dividends. But analysts said many shareholders likely would support dividends if they were tax-free.

Source: John D. McKinnon, "Cut in Taxes on Dividends Paid by Individuals Is Gaining Support," Wall Street Journal, December 4, 2002.


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