G-DAE Working Paper No. 03-01: “Read My Lips: More New Tax Cuts”
distribution of dividend income among seniors, most seniors with dividend income would
realize benefits less than $936 while a relatively small number would obtain benefits
much larger than $936. The administration also fails to mention that only about 22% of
all seniors have any dividend income at all. So over three-quarters of seniors would
receive no benefit whatsoever from the elimination of dividend taxation.
Is the President’s average tax savings estimate of $936 valid? The detailed data
necessary to explore the validity of this claim are not readily available.14 However, a
speculative analysis can be conducted which, incidentally, sheds some additional light on
what type of seniors receive dividend income. We know from Table 1 that the average
dividend income for a senior who received dividend income in 1999 was $4,627. A tax
savings of $936 would imply that the average marginal tax rate for dividend income
received by seniors would have to be 20.2%. In order for a senior to reach a tax bracket
above 15% (the next highest rate is 27%), he or she would have to have taxable income15
in 2002 of $27,950 if filing as single, and $46,700 if filing a joint return. However, most
seniors do not have sufficient income to enter the 27% tax bracket. According to the U.S.
Census Bureau, mean total income for seniors in 1999 was only $21,417.16 With
deductions and exemptions, average taxable income for seniors would be in the range of
$12,000 assuming a single filer with the standard deduction and exemption (less for a tax
status of married filing jointly). So, most seniors would be taxed at a maximum marginal
rate of 10% or 15%, inconsistent with the implied tax rate based on the administration’s
average benefits of $936.
We cannot conclude that the administration’s estimate of average tax savings is inflated.
The likely explanation is that seniors who receive dividend income have higher incomes
than most seniors and are taxed at a higher marginal rate. Of course, the problem with
this explanation is that it undermines the administration’s implication that needy seniors
rely on dividend income to get by. The analysis above suggests that most of these are not
low-income seniors struggling to make ends meet but reasonably secure seniors who are
not in desperate need of tax relief.
V. Who Really Benefits from Repealing Dividend Taxation
As one might expect from the data presented earlier, the major beneficiaries of the
dividend tax repeal would be the very wealthy, not seniors. An important point to
consider is that lower-income Americans who receive dividend income are taxed at lower
marginal rates. Many Americans are taxed at a maximum marginal rate of only 10% or
15%, and few are taxed at a rate above 27% (a married couple would need taxable
income of about $113,000 to exceed the 27% tax bracket). However, high-income
taxpayers are taxed at a higher marginal rate, up to 38.6% in 2002. So, typical taxpayers
receive little, if any, dividend income and would receive savings of 10%, 15%, or at most
14 Specifically, one would need to know the distribution of seniors’ income, including dividends, by AGI.
15 Note that taxable income differs from AGI. Basically, taxable income is AGI less deductions (itemized
or standard) and exemptions.
16 Money Income in the United States, 1999. Table 12.