Revised January 21, 2003

by John Springer

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The Center on Budget and Policy Priorities has released a report, Exempting Corporate Dividends from Individual Income Taxes, that examines the centerpiece of the Bush Administration’s proposed “growth package.”  As the Center’s report explains, eliminating the taxes that individuals pay on dividend payments they receive from corporations would have little short-term stimulative effect on the economy and would impose long-term economic costs by swelling the federal budget deficit.

Advocates of the proposal argue it is needed to end the “double taxation” of corporate dividends, which can face taxation at both the corporate and individual levels.  This ignores the significant and growing problem of corporate tax avoidance, which causes large amounts of corporate profits not to be taxed even once.  Indeed, a recent analysis published by the National Bureau for Economic Research finds that increased use of tax shelters lies behind the growing unexplained gap between the profits that corporations report to their shareholders and the much lower profit figures they report to the IRS; Citizens for Tax Justice estimates that in 2002 less than half of corporate profits were subject to the corporate income tax.  A reduction in dividend taxes should be considered only as part of a deficit-neutral corporate tax reform package that also curbs corporate tax avoidance and closes unproductive tax shelters.  The Administration has rejected this balanced approach in favor of a one-sided approach that will impose long-term costs on the economy.

In addition, the proposal has a number of specific weaknesses, such as:

            If the goal is providing an immediate economic stimulus, the Center’s report states, measures that extend and strengthen unemployment benefits, provide temporary fiscal assistance to the states, or direct a one-time tax cut to lower- and moderate-income working families would be far more effective than eliminating individual taxes on corporate dividends.  Moreover, these temporary economic stimulus proposals would not worsen the long-term budget outlook, unlike the permanent dividend tax cut.