Economic projections are notoriously malleable. This is certainly the case with projections for President Bush's stimulus plan, 2004 budget, and proposed tax cut plan. Analysts have noted Alan Greenspan's tepid response to the president's overall budget. And with war costs looming the Senate voted to nearly halve the proposed tax cut in late March, just days after the plan sailed easily through the House. The nonpartisan Congressional Budget Office released a comprehensive analysis of the President's 2004 budget on March 25, 2003. The study, while acknowledging the uncertainly of making economic projections, estimated that even with stimulus gains added in, the federal budget deficit would top one trillion dollars in the next five years.

The contradictory numbers swirling around the overall budget debate are also evident in the discussion of the pros and cons of the proposed repeal of the dividend tax. As our samples from the debate show, opponents of the proposed tax cut are concerned both with who benefits from the plan, and the loss of revenue it means for the federal government. The Congressional Budget Office report estimated the loss at $8 billion in 2003 and $388 billion total by 2013.

Who does stand to benefit from the repeal of the dividend tax? It is one part of the president's budget endorsed by Federal Reserve Chairman Alan Greenspan. According to Henry M. Paulson, Jr., Chairman and CEO of the Goldman Sachs Group, writing in THE WALL STREET JOURNAL, the president's dividend plan is "good for all Americans." Mr. Paulson suggested that the repeal of the tax will provide Americans with more money which will lead to more spending, noting that 84 million Americans now own stock.

Yet, also in the pages of THE WALL STREET JOURNAL are articles critical of the proposed plan, entitled "The Harsh Reality of Dividends," "Dividend Plan Won't Alter Retirement," and "Tax Cut Could Hurt Small Stocks." One piece, "The Devilish Dividend Details," by columnist Steve Liesman, notes: "the touted boon to elderly investors is not as bountiful as the Administration claims." In fact, so complex are the some of the calculations that they offer a free link to a TurboTax calculator from the dividend tax feature page.

The Urban Institute-Bookings Institution Tax Policy Center estimates that only top 1 percent of all tax filers would get an average tax cut of 24-thousand dollars, while the bottom 80 percent would get an average tax cut of just 226 dollars.

Crunching the Numbers

Two studies of the proposed dividend tax cut come to different conclusions. Both studies, and their charts and figures, are available on the Internet.

The The Heritage Foundation's study "Who Really Benefits from Dividend Tax Relief" focuses on the number of Americans who receive dividend income — the "millions of Americans, including many who earn less that $100,000 a year." The Foundation's study also stresses the importance of dividend rebates to raising overall stock prices, and thus employees' 401K accounts would see a secondary increase.

The double taxation of dividend dollars affects all investments. All investment vehicles compete for investors’ dollars; therefore, any noticeable change in one investment’s rate of return must affect the others’ relative rate of return. Furthermore, all true dividends are subject to this double taxation.

Millions of families would benefit from dividend tax relief whether or not they directly receive dividends. By the end of 2000, about 42 million workers in the United States with a median annual salary of less than $60,000 owned a 401K plan. Similarly, at the start of 2002, some 40 percent of U.S. households with a median annual household income of $55,000 owned an individual retirement account (IRA). Since the same investments held in retirement accounts are also held in non-retirement forms, these families with private retirement accounts would also share in the benefits of dividend tax relief.

The Center for Budget and Policy Priority's "Exempting Corporate Dividends from Individual Income Taxes" focuses not on the percentage of Americans who receive dividend income overall but the percentage of that income which reaches each economic group. According to their figures:

Nearly two-thirds of the benefits of exempting corporate dividends from the individual income tax would flow to the top five percent of the population, because these taxpayers own the lion’s share of stocks. (The top five percent includes tax filers with incomes over $140,000; these filers have average income of $350,000.)

The top one percent of tax filers — a group whose incomes start at $330,000 and that has average income of about $1 million — would receive 42 percent of the benefits.