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
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
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.