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Bush Tax Cut Unfair, Won't Help Economy
Why the "double taxation of dividend income" argument is utter HOGWASH

by Chris Hartman and David Martin
Revised June 6, 2003

The dismantling of 70 years of U.S. social progress continues apace with a tax cut that will further constrain the ability of the government to deliver the things Americans repeatedly say they want and need: affordable health care, a secure retirement, a clean environment, and a safe and fair workplace, among other things.
Don't Like Paying Taxes?
Then show us you really mean it! (From Buzzflash)

As UFE Program Director Chuck Collins recently said on National Public Radio's Marketplace program, "I think about how this tax cut's going to affect me personally. My daughter's going to lose her librarian, her art teacher. We're going to wait longer for the bus. The municipal pool is going to be closed this summer. You know, at some point, as a taxpayer I have to say, 'Yes, it's my money, but I got something for my tax dollars, and it's going away.'"
Trickle-Down Economics Fails
Four reasons why cutting taxes on the wealthy doesn't help the economy.

On May 28th, President Bush signed into law the so-called "Jobs and Growth Act," a tax cut package. This tax cut targets its benefits toward the wealthiest Americans. For that reason alone, this tax cut is not an economic stimulus — the only thing this tax cut "stimulates" is more economic inequality in the U.S.
More Analysis:
Citizens for Tax Justice
Center on Budget and Policy Priorities
Urban/Brookings Tax Policy Center

Half of all Americans will receive less than $100 from the tax cut in 2003, according to Citizens for Tax Justice. But Americans making $1 million or more will receive $93,500 from the tax cut, according the Tax Policy Center.

Over the next four years, the bottom 60 percent of taxpayers will receive just 9 percent of all the tax cuts, while just the top one percent receives 39 percent of the tax cuts. The tax cut benefits flowing to the top 1% far outpace the 23% share of federal taxes they now pay.
Take action: Join the Shareholder Rebellion against Companies That Lobbied for the Dividend Tax Cut

The distribution of tax cuts do not get better with age. The tax cuts targeted at middle- and low-income families sunset, or disappear, after 2004. As a result, in 2006, 52 percent of the Bush tax cut goes to the wealthiest 1 percent of Americans.

The length and skew of the tax cut is probably the worst possible way to stimulate the economy. For tax cuts to work as an economic stimulus, they should immediately put money into the hands of those most likely to spend it: middle- and low-income families. Notice: This does not require fundamental reform of the tax code. Instead, the new tax cut package through the dividend and capital gains tax cut reforms the tax code to give a long-term tax cut to those least likely to spend it: America's wealthiest.

The questionable effectiveness of the tax cut as an economic stimulus is reflected by the fact that the package gives limited aid to states. The recession has caused a sharp decline in state revenues, while demand for services have shot up. The resulting is that states face the worst budget crises since the Great Depresion.

Over the next few years, the projected combined state budget deficit is $180 billion and rising, according to the Center on Budget and Policy Priorities. Under pressure from moderate Republicans in the Senate, the final package included $20 billion in state aid over the next 2 years, which, given the scale of the combined state deficits, is little more than window dressing for a tax cut for the wealthy.

Most states are constitutionally required to balance their budgets. So, in order to close their budget deficits, state legislatures will have to either cut spending or raise taxes. By cutting spending, they will layoff public sector workers leading to further declines in demand. Most states rely on the sales and property taxes for revenue, which most directly affect middle- and low-income families.

If states raise sales or property taxes, they will take will take money out of the hands of those who received the least from the Bush tax cut. As a result, by failing to adequately address the state budget crises, the Bush tax cuts counteract any possible stimulus that it could provide to the economy.

The Bush tax cut may be a boon for the wealthiest Americans but it's a bust for the rest of us.

Problems with the plan:
Take action: Join the Shareholder Rebellion against Companies That Lobbied for the Dividend Tax Cut

The dividend tax cut is unfair.
Why in the world should income from investments be taxed at a lower rate than income from work?

There is no such thing as a broad “investor class” that will benefit from the dividend tax cut.
Only half of all Americans own any stock at all. Most of the stock owned by middle class folks is tied up in 401(k) plans, which will not benefit from the dividend tax cut. Any short-term boosts in stock prices in middle-class portfolios will likely be offset by higher interest rates (see next item).

One beneficiary of the dividend tax elimination will be Wall Street firms, who will generate huge fees helping corporations restructure their businesses to pay out more dividends. (Of course, Wall Street firms are leading campaign contributors to both parties.)

The dividend tax cut will raise interest rates.
As dividend-paying stocks become more attractive to investors, people will pull money out of the bond market, leading to higher interest rates. That means higher mortgage and car loan rates, and higher borrowing costs for small businesses and state and local governments.

The “double taxation on dividends” argument is hogwash.
Proponents of the dividend tax cut say that corporate profits are taxed twice, once with the corporate tax, and again with the tax on dividends.

You know, it's funny: The anti-tax crowd always used to say that corporate taxes were just passed along to consumers. Now they claim that, no, it's the shareholders who pay corporate taxes.

But as Economist Dean Baker of the Center for Economic Policy Research points out, that's not even true. "The courts have repeatedly ruled that corporations are legal individuals and altogether distinct from their shareholders," Baker writes in the March 10, 2003 Economic Reporting Review. "Current law taxes the income that corporations receive. It also taxes the income that shareholders receive as individuals, just as it taxes the income that workers receive from corporations."

Under our system, the same dollar is taxed multiple times as it moves through the economy, from an employer to an employee to a gas station and then on to the next employee, ad infinitum. Singling out dividends for exemption from this process is unfair to those who have little or no dividend income.

As Bob McIntyre of Citizens for Tax Justice points out, the meaningful economic concept here is the tax rate, not the number of times a tax is imposed. Which would you rather pay: a single tax of 40% or a two taxes of 10% each?

Also, McIntyre reminds us, due to special corporate tax breaks, most corporate profits are currently escaping corporate taxation entirely. And, only a small portion of corporate profits are actually paid out each year as dividends, mostly into tax-exempt pension funds and retirement accounts. "The bottom line is that the so-called 'double tax' doesn't come close to taxing corporate profits even once," McIntrye says.

Overall, the package won’t provide enough of a boost to the economy.
It’s too tilted towards the wealthy, who tend to save, not spend, any additional money they receive. What the economy needs, and what low and moderate-income families need, is more spending money, right now. Companies won’t hire more workers if they have no demand for their products. The Bush plan delivers most of its tax benefits in 2004 or later — too late to help the economy now.

A better alternative would have been the stimulus plan proposed by the Economic Policy Institute.
It takes effect right now and would help the economy immediately, rather than slowly over time as does the Bush plan.

Item
Immediate cost in $billions
One-time wage bonus of 3.5% of the first $15,000 in wages ($525 maximum bonus per worker)
$65
Funds to states for health, education, law enforcement, and other critical services
$50
School repair and renovation (would also create good jobs)
$25
Aid to unemployed
$25
Miscellaneous state aid
$10

More details on the Economic Policy Institute stimulus proposal.