nr010803: Dividend Tax Cut Would Help Millions of Middle-Class Americans, Study Finds

Dividend Tax Cut Would Help Millions of Middle-Class Americans, Study Finds

President Bush's proposal to end the tax on dividend income not only doesn't qualify as a "sop to the rich," as critics have charged, it could play a key role in preventing corporate disasters such as Enron, according to a new paper from The Heritage Foundation.

With about 84 million people—representing nearly half of all American households—owning stock, removing the tax on dividends no longer can be said to benefit only the rich, says Norbert Michel, a policy analyst in Heritage's Center for Data Analysis. Indeed, investment tools such as 401(k) plans and individual retirement accounts (IRAs) have thrust millions of Americans who make $60,000 or less per year into the "investor class."

Michel's analysis of IRS data shows that 70 percent of all taxpayers who received dividends in 1998 earned less than $55,000 in wages and salary. By the end of 2000, 42 million workers who make less than $60,000 per year were participating in 401(k) plans, and by 2002, 40 percent of households with incomes of $55,000 or less owned IRAs. Of the $2.4 trillion in assets held in employer-sponsored retirement plans and IRAs in the country, nearly $1.5 trillion—about 63 percent—is invested in domestic stocks.

"Clearly, dividend tax relief would benefit far more than just the top income groups," Michel says.

He notes that the current practice of taxing business profits twice—once as corporate earnings and again as shareholder earnings—means government can end up pocketing more than 50 cents of every dollar of distributed corporate profit. This double-taxation not only reduces dividend income for middle-class families, it also discourages investors from backing companies that pay regular dividends. Worse, it encourages corporations to retain profits and instead expand through borrowing—a riskier strategy—solely because of the tax advantages.

"We shouldn't be encouraging companies to incur debt to finance growth when they could do so with their own equity," Michel says. "The way we tax dividends contributes to numerous economic distortions, and the way companies have been forced to take on debt has led to some of our worst corporate scandals. Congress needs to change this."

Congress could make the tax treatment of dividends more "neutral," Michel says, by allowing corporations to deduct dividend payments from their taxes—just as they do with interest payments—or perhaps allow investors to receive tax credits on their individual returns to offset the dividends tax.

Heritage Foundation Leadership for America

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