The Heritage Foundation

WebMemo #183 on Taxes

January 6, 2003

January 6, 2003 | WebMemo on Taxes

Dividend Tax Relief Will Benefit All Americans

Tomorrow, President Bush is expected to detail an economic stimulus plan that includes eliminating the income tax investors pay on corporate dividends. He's right to do so.

 

Nixing the tax would end double taxation on dividends (once at the corporate level, another when they're paid to shareholders). It will also save Americans of all income levels as much as $300 billion a year.

 

President Bush's proposal is being criticized for aiding only the wealthy or focusing on stimulus that would do too little. The Washington Post reports Monday that an analysis done by two economists shows that "eliminating taxes on dividends paid to individuals, the centerpiece of President Bush's stimulus package, would do little to spur economic growth or reduce the nation's jobless rate…"

The facts, however, show an amazingly different story. Millions of Americans, including many who earn less than $100,000 a year, earn dividend income and would benefit greatly from dividend tax relief.

In a new report from Heritage's Center for Data Analysis (now released: Who Really Benefits from Dividend Tax Relief?), Policy Analyst Norbert Michel examines who really benefits from the dividend tax relief plan. Supporting his findings with numerous charts and statistical analysis, Michel finds:

Millions of families would benefit from the dividend tax relief, including the many moderate-income workers who receive dividends. As of 2000, more than 42 million American workers owned a 401(k) plan, and nearly 40 percent of all U.S. households owned an IRA. Data show that, as of 2002, nearly 53 million U.S. households (just under 50 percent) and about 84 million individuals owned some form of equities. Additionally, in 1998, 70 percent of all taxpayers receiving dividends earned less than $55,000 in wages and salary. (Editor's note: Norbert Michel's paper acknowledges that this is not a perfect measure because the IRS also classifies interest from mutual funds as dividend income.)

 

All true dividends are subject to double taxation. Since all investments compete for investor's dollars, removing the 35 percent layer of corporate dividend taxes would affect other investments as well. Even the fact that many American hold equities in tax-deferred accounts will not, in the long run, diminish the impact of eliminating the double taxation of dividends. Dividend tax relief may be criticized as providing a tax break for "the wealthy," but the IRS own data clearly suggests otherwise.

Norbert Michel's paper, Who Really Benefits from Dividend Tax Relief?, is now available. The paper includes charts, and an explanation of the methodology.

The Heritage Foundation has also released the Tax Dividend Calculator (Flash 6 plug-in required) which allows individuals to calculate their personal savings if double-taxation on stock dividends is ended.

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