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

I. Introduction

In January of 2003 President Bush outlined a proposal for a new round of tax cuts
intended to boost the American economy. A key component of this proposal is the repeal
of dividend taxation for individual taxpayers. In his January 28, 2003 State of the Union
speech, Bush stated that:

“We should also strengthen the economy by treating investors equally in our tax
laws. It's fair to tax a company's profits. It is not fair to again tax the shareholder
on the same profits. To boost investor confidence, and to help the nearly 10
million seniors who receive dividend income, I ask you to end the unfair double
taxation of dividends.”¹

The implication that dividend taxation particularly harms low-income seniors is repeated
in further official presentation of the President’s plan:

“Roughly 35 million American households receive dividend income that is
taxable and will directly benefit under the President's plan. More than half of
these dividends go to America's seniors, many of whom rely on these checks for a
steady source of income in their retirement.”

“Almost half of all savings from the dividend exclusion under the President's plan
would go to taxpayers 65 and older. The average tax savings for the 9.8 million
seniors receiving dividends would be $936.”²

From these statements, we see that the President offers three points in promoting his
proposal. First, repealing shareholder dividend taxation will boost investor confidence
and provide a stimulus to the economy. Second, the current scheme of taxing dividends
at both the corporate and shareholder level is unfair. Third, the tax cut will particularly
benefit seniors.

This paper will primarily analyze the distributional implications of the President’s
proposal to repeal dividend taxes, including the impact on seniors. However, before
proceeding to the analysis some brief comments are offered on the first two supporting
reasons presented by the Bush administration for the tax plan.

The stimulus effect of the President’s proposal has its supporters and detractors, among
both politicians and economists. A group of over 450 economists, including 10 Nobel

¹ Excerpt taken from http://www.whitehouse.gov/news/releases/2003/01/20030128-17.html. Accessed
Feb. 20, 2003.

² Excerpts taken from http://www.whitehouse.gov/infocus/economy/. Accessed Feb. 5, 2003.

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