Earlier this year President George W. Bush unveiled a
multi-faceted proposal to improve the nation's economic growth. One
of the most important features of his plan calls for abolition of
the current federal double taxation of corporate dividends paid to
individual shareholders.
Critics of the plan charge that it will cost the government too
much money. However, they are making a fundamental
mistake. By relying on a defective methodology to estimate
the proposal's cost, they are ignoring the economic growth and job
creation that will be brought about by ending federal double
taxation of corporate dividends.
Both the United States Treasury and the Urban-Brookings Tax
Policy Center have released exaggerated cost estimates of President
Bush's plan. The Treasury says that it will cost $364 billion
over the next ten fiscal years (2003-2012); the Tax Policy Center
says it will cost $330 billion. Both of these estimates are
based on a "static" approach that ignores the economic effects of
the President's plan.
The Center for Data Analysis (CDA) at The Heritage Foundation
used a sophisticated reality-based scoring method to evaluate the
President's dividend taxation relief plan. Reality-based
scoring recognizes that a stronger economy generates more tax
revenue. It therefore estimates the economic growth and job
creation that would come about from tax relief proposals such as
the President's.
A preliminary CDA analysis of the President's dividend tax
relief plan finds that it would:
- cost a total of $102 billion over 2003-2012, instead of upwards
of $300 billion;
- increase the employment level by an annual average of 311,000
taxpaying jobs between 2003-2012;
- increase Gross Domestic Product (GDP) by an average of $40
billion between 2003-2012;
- increase purchases of business equipment by an average of $32
billion between 2003-2012.
President Bush's proposal recognizes and solves the real
economic problem facing the country: slow growth. Abolishing the
double taxation of corporate dividends produces conditions for
stronger growth.
In the real world, tax policy exerts a significant effect upon
economic growth. This growth, in turn, affects tax
revenues. The Tax Policy Center can ignore this feedback
effect in its static analyses. However we prefer to live in
the real world.
Alfredo Goyburu is a policy analyst in the Center for Data
Analysis and Andrew Olivastro is senior Web writer, at The Heritage
Foundation.