January 8, 2003 | WebMemo on Taxes
Fiscal Effects of Dividend Tax Relief
President Bush's economic growth package includes a proposal to
eliminate double taxation of stock dividends. Abolishing this
unfair double standard in taxation can do much to boost economic
A sophisticated reality-based economic forecast analysis by The
Heritage Foundation's Center for Data Analysis (CDA) projects that
a proposal similar to the President's would boost economic growth,
create jobs and significantly improve family incomes over the next
The effects would include:
Income. Disposable personal income would increase by an
inflation-adjusted average of $56 billion or more per year from
2003 to 2012. For a two-earner family of four, disposable income
would be increased by an average of $384 per year.
Fuel economic growth. Gross domestic product
(GDP) would increase by an average of at least $32 billion per year
(adjusted for inflation) from 2003 to 2012. GDP would be an
inflation-adjusted $22 billion higher in 2004 and $45 billion
higher in 2012.
more job opportunities. The proposal would increase the
number of jobs by at least 325,000 in 2012. This increase in jobs
would correspond to a decline in the unemployment rate of no less
than 0.2% per year over the next ten years.
business investment. Non-residential investment would
average nearly $25 billion per year (adjusted for inflation) higher
between 2003 and 2012. By the end of FY 2012, the net capital stock
would be at least an inflation-adjusted $174 billion higher. The
user cost of capital would be about 5.4 percent lower in
Increase disposable personal income. Disposable personal income
would increase by an inflation-adjusted average of $56 billion or
more per year from 2003 to 2012. For a family of four, this
increase in disposable income would correspond to an average of at
least $768 per year.
personal savings and personal consumption. Personal
savings would average an inflation-adjusted $18 billion higher
during the ten-year period. Personal consumption expenditures would
average an inflation-adjusted $36 billion.
slightly increase consumer prices. Under this proposal,
growth in the consumer price index would average 0.1 percent higher
during 2004-2008. Over the final four years of the forecast period,
increases in the price level would be virtually unchanged over the
inflation in the baseline.
reduction in federal government's tax collections. The
dividend proposal would reduce federal tax revenues by an average
of about $12 billion over the first five full years of the
proposal. During the final four full years of the proposal,
2009-2012, the tax cut would be virtually revenue neutral, reducing
federal revenue by an average of less then $1 billion per year.
During the final year of the forecast, federal tax revenue would be
slightly higher, than it would be under current law.
- Increase federal spending. If Congress were
not to enact reductions in federal spending to offset the tax
revenue reductions caused by this tax cut, then overall federal
spending would increase under this proposal. Spending would average
about $13 billion higher under this proposal. About two-thirds of
this increase would result from increases in federal interest
payments. The rest would be caused by increases in federal
expenditures for income maintenance programs for federal and Social
Security retirees. These increases would be caused solely by the
increases in consumer prices observed during the years
Foundation report investigates the 10-year economic and fiscal
impact of a sample proposal to abolish double taxation on corporate
dividends, and finds that such a proposal would, by the year 2012,
improve growth in the nation's gross domestic product, add hundreds
of jobs to the economy, increase investment, strengthen growth in
disposable income, and add to the nation's capitol stock.
and assumptions, including several charts and graphs, will be
introduced upon publication of a full paper - expected the last
week of January - written by Norbert Michel, Al Goyburu and Ralph
Rector. Nothing contained in this report should be construed as an
endorsement of any proposal by The Heritage Foundation or as an
attempt to aid or hinder the passage of any bill before