TAX-FREE DIVIDENDS

Is it a good idea, as President Bush proposes, to eliminate taxes on the dividends that corporations pay to stockholders? Critics call it a pay-off to the rich. He calls it an economic stimulus measure and says it will promote growth and jobs.

As to the pay-off charge: Whom does it help? The Internal Revenue Service refers questioners to the Tax Policy Center, operated by the Brookings Institution and the Urban Institute. The center’s chart on the impact of exempting dividends shows a breakdown by income groups. In brackets up to $100,000, after-tax income will rise by 0.1 to 0.4 percent. Above that level, the gains increase rapidly: for $100,000-$200,000, 0.8 percent;

for $200,000-$500,000, 1.5 percent; for $500,000-$1 million, 1.8 percent; for more than $1 million, 2 percent. In dollar terms, taxpayers earning $100,000 or less will save up to $336 in taxes, but those making $500,000 to $1 million will save $9,372. Those making over $1 million will save $45,098.

In a general tax cut, it is common for the rich to benefit more because they pay more, but the losses in government services – of roads not maintained, schools understaffed or ill-equipped, health care services absent – affects taxpayers equally or hits the middle class and poor harder. This is not surprising either, but the point of doing without these services in the short term is to stimulate the economy and make it healthier for the long term.

The dividend tax elimination adds no immediate stimulus because any increase in spending from these tax savings can’t come this year, since many investors won’t get their savings until 2004. And the wealthy stockholders, who will benefit the most, tend to change their spending habits more slowly than the poor and middle class in response to changes in income.

We will hear a lot about how dividends get double taxation. Sure, the corporation pays taxes on its profits and the stockholders pay taxes on what’s paid out in dividends. But the only people who worry much about taxes on dividends are the wealthy and Charles Schwab, the stockbroker who sold Mr. Bush on the idea last summer. Salaries are taxed twice, too – once by the income tax and later by the sales tax when we spend the money.

Other features of the president’s plan include a $400 sweetener increase in child tax credit and $3.6 billion for states to aid unemployed workers. But the centerpiece of the plan, ending the taxation of dividends, looks more line a handout for high-income campaign contributors than a sensible stimulus measure.