January 8, 2003 | News Releases on Taxes
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
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
"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
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.