Tuesday, May 21, 2013
Ten years ago this month, Congress enacted the third major tax cut of the George W. Bush administration. Its centerpiece was a huge cut in the tax rate on dividends. Historically, they had been taxed as ordinary income, but the Bush plan, enacted by a Republican Congress, cut that rate to 15 percent. The tax rate on ordinary income went as high as 35 percent.
This initiative originated with the economist R. Glenn Hubbard, who had been chairman of the Council of Economic Advisers when the proposal was sent to Congress. Mr. Hubbard was a strong believer that the double taxation of corporate profits – first at the corporate level and again when paid out as dividends – was a major economic problem. ...
In an op-ed article in The Washington Post on Nov. 16, 2001, he predicted that the soon-to-be-enacted 2002 tax cut, which President Bush signed on March 9, 2002, would “quickly deliver a boost to move the economy back toward its long-run growth path.”Mr. Hubbard predicted that it would create 300,000 additional jobs in 2002 and add half a percentage point to the real gross domestic product growth rate.
There is no evidence that the tax cut had any such effect. The unemployment rate remained above 5.7 percent all year, rising to 5.9 percent in November and 6 percent in December. The real G.D.P. growth rate fell each quarter of 2002, and by the fourth quarter growth was at a standstill. Hence the need for yet another big tax cut. ...
The Treasury Department issued a fact sheet on July 30 asserting that the decline in dividends had been a cause of the weak stock market and noting that dividend payouts had risen since enactment of the tax cut on May 28. Subsequent research, however, found that the increase in dividends was a short-term phenomenon and mainly at companies where stock options were a major form of executive compensation.
- Federal Reserve Board, How Did the 2003 Dividend Tax Cut Affect Stock Prices and Corporate Payout Policy? (2005)
- Federal Reserve Board, Executive Financial Incentives and Payout Policy: Firm Responses to the 2003 Dividend Tax Cut (2006)
- National Tax Journal, The Effect of the May 2003 Dividend Tax Cut on Corporate Dividend Policy: Empirical and Survey Evidence (2008)
- Federal Reserve Board, Effects of the 2003 Dividend Tax Cut: Evidence from Real Estate Investment Trusts (2010)
- U.S. Treasury Department, Office of Tax Analysis, Taxes and Financial Portfolio Choices: Evidence from the Tax Rate Reductions of the 2001 and 2003 Tax Acts (2011)
- UC-Berkeley, Capital Tax Reform and the Real Economy: The Effects of the 2003 Dividend Tax Cut (2013)