There’s still a lot of work for Congress to do on President Bush’s proposed $550 billion tax cut. Because of objections by liberal Republican Sen. Olympia Snow of Maine, the president’s original proposal to entirely end the double tax on dividends may be gone for now.
“The Senate’s Republican tax writers struck on an agreement Wednesday” on a proposal in which shareholders “would not pay taxes on the first $500 of dividend income,” reported The Associated Press. Those making dividends above $500 would get another 10 percent of dividends tax-free in the first five years, then 20 percent total tax-free for the following five years.
All tax cuts are welcome. But these tax cuts won’t have much of an impact encouraging investment in American companies to create new industries and jobs. The problem with the dividend tax is that it’s a double whammy: First the company is taxed on income at about 35 percent, then dividends paid to the investor taxed at 35 percent, for a combined tax rate on capital of about 70 percent.
Cutting entirely the dividend part of the tax to zero would halve that combined tax rate on capital to 35 percent (35 percent corporate plus 0 percent dividend). Economist Gary Robbins, president of the Fiscal Associates consulting firm, calculates that eliminating the tax entirely would increase production so much that GDP would increase by an added 3 percentage points per year.
Imagine how many jobs that would create.
But if the 35 percent dividend tax is reduced by one-fifth, the tax will drop only to 28 percent. So the combined rate (35 percent corporate tax plus 28 percent dividend tax) still would be 63 percent, causing only a slight increase in production and jobs creation.
The current plan also would give $20 billion to ailing state government budgets. That’s not tax-cutting, but spending for state governments that got into financial messes by spending way too much.
President Bush and members of Congress ought to insist on a complete elimination of the dividend tax — and no bailout of state government wastrels.