03-01 "Read My Lips: More New Tax Cuts - The Distributional Impacts of Repealing Dividend Taxation"



G-DAE Working Paper No. 03-01: “Read My Lips: More New Tax Cuts”

Read My Lips: More New Tax Cuts - The Distributional
Impacts of Repealing Dividend Taxation

Brian Roach
[email protected]

Abstract

The Bush administration advocates its January 2003 proposal to repeal personal dividend
taxation on the basis that the cut would stimulate the economy, primarily benefit
American seniors, and eliminate an unfair case of “double taxation.” This paper
primarily analyzes the proposal using a different criterion - its distributional impacts.
Contrary to the administration’s claim that seniors receive over half of all dividend
income, U.S. Census Bureau data indicate that seniors receive only about one-quarter of
dividend income. Dividend income is more concentrated towards high-income tax filers
than the distribution of U.S. income as a whole. About two-thirds of dividend income
accrues to the top 10% of tax filers. Less than one-fifth of tax filers with adjusted gross
incomes of less than $75,000 have any dividend income at all. Also, dividend income is
highly skewed by race - only 8% of blacks and 6% of Hispanics receive dividend
income.

An analysis of the distribution of the benefits of repealing dividend taxes is conducted
using IRS summary data of the 2000 tax returns. Most taxpayers (about three-quarters)
receive no dividend income and would receive no direct benefits from the proposal to
repeal dividend taxes. On the other hand, filers with an adjusted gross income of at least
$100,000 would receive average annual benefits of over $3,000. Over 75% of the total
benefits would accrue to the top 8% of taxpayers. About 40% of the benefits would
accrue to the top ½% of taxpayers, who would receive average annual tax savings of
about $26,000.

The distribution of benefits is more skewed than the distribution of dividend income.
From this fact we can conclude that the proposal to repeal dividend taxation would,
ceteris paribus, increase after-tax income inequality in the U.S. Given that U.S.
inequality is higher than in any other developed country and at an historic high, policies
that reduce inequality seem more desirable than those that have the opposite effect.
Given the significant cost of the overall tax cut, one likely long-term effect is the
reduction of federal services including, perhaps, Social Security benefits. Thus, the
ironic conclusion is that the President’s proposal, rather than helping low-income seniors,
appears more likely to hurt them because of the potential for shortfalls in Social Security
funding in the long term.



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