G-DAE Working Paper No. 03-01: “Read My Lips: More New Tax Cuts”
In contrast, at the upper end of the income distribution significant savings are evident
(see Table 3). Taxpayers with an AGI of over $100,000 receive an average benefit of
over $3,000. Those with an AGI of $10 million or more receive an average benefit of
over $300,000. So, a typical taxpayer receives a very small benefit, if any, from the
President’s proposal while very high-income payers receive huge benefits.
The second-to-last column in Table 3 indicates the distribution of the tax savings from
repealing the dividend tax. Those taxpayers with an AGI of less than $50,000 (about
72% of all taxpayers) would receive an aggregate share of only 9% of the benefits. On
the other hand, those with an AGI over $100,000 (just 8% of taxpayers) would receive
slightly over 75% of the savings. Even further, most of those benefits (nearly 40% of all
benefits) would accrue to the highest ½% of taxpayers, those with an AGI of $500,000 or
more.
VI. Impact on Economic Inequality
Given that the wealthy receive the majority of dividend income, it is not surprising that
they would receive most of the benefits. This will be true with any across-the-board tax
cut. High-income filers pay most of the taxes in the U.S. and would receive most of the
benefits of any general tax cut. So, the fact that the benefits of repealing dividend
taxation accrue predominately to the wealthy does not necessarily imply that repealing
dividend taxation exacerbates economic inequality in the U.S. To explore this issue, one
needs to determine how the proposal affects the overall distribution of after-tax income.
One way to conduct this analysis is to estimate the percentage change in income for
different AGI levels. For a policy to be neutral with respect to inequality levels, those in
all income categories would see their income increase (or decrease) by the same
proportion. As seen in the last column of Table 3, that is not the case with the proposal to
repeal dividend taxes. Those with a low AGI see a minor increase in their average
income - less than 0.5% (using a base of average AGI). However, those with more than
$200,000 in AGI see an income increase over 1.0%. From these data, we can conclude
that repealing dividend taxation will, ceteris paribus, increase income inequality in the
U.S.
Similar to Figure 1, we can plot the distribution of the benefits of repealing the dividend
tax against the distribution of returns ordered by AGI. Figure 2 shows the results, which
again are highly-skewed towards those with high AGI’s. The distribution of tax savings
can again be calculated using a coefficient similar to a Gini ratio. The results based on
the data shown in Figure 2 produce a coefficient of 0.83. So, the distribution of the
benefits of repealing the dividend tax is more unevenly distributed than dividend income
itself (coefficient of 0.70), and much more unevenly distributed than overall income in
the United States (coefficient of 0.47). Again, this demonstrates that repealing dividend
taxes will further increase income inequality in the U.S.
11