G-DAE Working Paper No. 03-01: “Read My Lips: More New Tax Cuts”
laureates, recently signed a statement in opposition to the overall tax plan. Regarding the
proposal to repeal dividend taxation, the statement reads:
“The permanent dividend tax cut, in particular, is not credible as a short-term
stimulus. As tax reform, the dividend tax cut is misdirected in that it targets
individuals rather than corporations, is overly complex, and could be, but is not,
part of a revenue-neutral tax reform effort.”3
In opposition, a statement signed by over 100 economists, including three Nobel
laureates, expressed support for the Bush administration’s overall proposal, including
repealing dividend taxation.4 On February 11, 2003, Federal Reserve chairman Alan
Greenspan questioned the need for the fiscal stimulus embodied in the tax cut proposal.
While Greenspan expressed support for the basic concept of eliminating dividend
taxation, he stressed that such a tax cut should be offset by tax increases or spending
cuts.5
The President’s second point, that dividend taxation is unfair, must be evaluated in the
context of the broader tax code. “Double taxation” is not unique to the situation of
dividends. In fact, double taxation is both widespread and commonly accepted. For
example, state sales taxes represent a form of double taxation - income is taxed by states
both when it is received and when it is spent. Excise taxes on goods such as gasoline,
cigarettes, and alcohol can also be viewed as a double taxation. Other factors are more
important than how often a transaction or income is taxed, including the overall tax rate,
the distribution of taxes, and the effect of taxation on market outcomes. So the
President’s inference that double taxation is, in principle, unfair does not appear justified.
The economists publicly opposing the Bush tax cuts have criticized the President’s
proposal in that it will “generate further inequalities in after-tax income.”6 Franco
Modigliani, who received the 1985 Nobel in economics, called the proposal to repeal
dividend taxes “a preposterous program. It has only one effect: to make the very rich”
richer. While the 2000 Nobel winner Daniel McFadden called it a “weapon of mass
destruction aimed at the middle class.”7 This paper specifically analyzes the
distributional implications of the proposal to repeal dividend taxation. Three important
conclusions are reached:
1. The President’s claim that more than half of dividends go to seniors is not
supported by the data. Instead, the majority of dividends go to high-income
households, particularly those that are middle-aged and white.
3 The full statement is available at http://www.epinet.org/stmt/2003/statement signed.pdf(Accessed Feb.
20, 2003). The statement also appeared in a full-page ad in the New York Times on Feb. 11, 2003.
4 The full statement, as sent the U.S. Congress by the National Taxpayers Union, is available at
http://www.ntu.org/features/ntu on capitolhill/L0301taxpayeragenda.php3 (Accessed Feb. 20, 2003).
5 “Greenspan Throws Cold Water On Bush Arguments for Tax Cut,” New York Times, Feb. 12, 2003, Sec.
A, Page 1.
6 From the Economists’ Statement Opposing the Bush Tax Cuts, available at
http://www.epinet.org/stmt/2003/statement_signed.pdf (Accessed Feb. 20, 2003).
7 “Nobel Laureates Attack Tax Plan,” Boston Globe, Feb. 11, 2003, Page D1.