DIVIDEND TAX-CUT KEY TO BOOSTING ECONOMIC GROWTH, ANALYSTS SAY

Dividend Tax-Cut Key to Boosting Economic Growth, Analysts Say

WASHINGTON, MARCH 28, 2003—No one knows how large a tax cut Congress will finally pass—at $350 billion, the Senate version is half the size of the House-approved one—but a new paper from The Heritage Foundation makes one thing clear: Cutting the tax on dividends is indispensable to creating economic growth.

"Few tax policies are more destructive than the 'double taxation' of corporate profit," write Daniel Mitchell, Norbert Michel and David John. "Double taxation punishes an activity—investment—that is unambiguously good for the nation as a whole."

Critics insist that elimination of this double taxation would help only the rich, but as Federal Reserve Board Chairman Alan Greenspan recently told Congress, "elimination of the double taxation of dividends will be helpful to everybody," which, he said, is "one of the reasons I strongly support it." As Mitchell, Michel and John note, some 84 million Americans now own equities, either directly or in tax-deferred retirement plans.

Under President Bush's proposed plan, individual stockholders no longer would have to pay taxes on dividend income. And that's only fair, the Heritage analysts say, since all corporate profits are taxed already before dividends are handed out.

But it isn't just a matter of making the tax system fairer, they say: Ending the double taxation of dividends also would jumpstart the economy. A 1992 Treasury Department study found that, even in the absence of increased investment, eliminating double taxation eventually would raise economic output by about $36 billion each year. That would be a critical boost as the country tries to recover from recession, the analysts say.

Investors also could expect to benefit, in both the short and long runs. Right now, only about 30 percent of companies pay dividends, but more likely would start if the dividend tax was cut. This would immediately put more income into stockholders' pockets. Plus, the authors say, "experts estimate that simply passing President Bush's repeal of the double tax could lift the entire stock market by as much as 10 percent." That alone would replace some 45 percent of the average investor's loss last year.

Finally, ending the second layer of tax on dividends "would encourage companies to restructure their finances and improve their balance sheets, thereby reducing bankruptcies," the authors say. The current tax code encourages companies to borrow money rather than build equity. They say a fair system that taxed corporate income only once would encourage companies to pay dividends rather than pile up debt—which becomes difficult to repay if revenues drop during an economic downturn.

"The president's entire plan would encourage investment, create jobs and help get the economy growing again," the Heritage analysts say. "But in modifying it, lawmakers shouldn't jettison its most critical component: eliminating the double taxation of corporate dividends."

More information can be found online at Heritage's "Reality Check" on taxes at: www.heritage.org/research/taxes/taxbriefingroom.cfm.

Heritage Foundation Leadership for America

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