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