Despite being roughly half the size of what the president
initially requested, the $350 billion tax cut signed into law last
week is being claimed as a major political victory by the White
House. A prominent factor in the Bush administration's satisfaction
with the final version of the law is the inclusion of an amendment
to reduce the dividend tax on investors, one of the most
contentious aspects of the bill. But even the inclusion of that
amendment is not an unmitigated win for Bush. The president settled
for lowering the dividend rate cap to 15% -- and even that change,
according to the bill's current sunset provision, would disappear
at the end of 2008.
The dividend tax issue throws the philosophical differences
between the two parties into sharp relief. The Bush camp sees the
dividend tax as an unfair double-taxation on investors (because
corporations already pay income taxes on their profits), while
critics say cutting the levy is unfair because it shifts
more of the tax burden from the wealthy to middle-class and
lower-income Americans. The debate is unlikely to be resolved, but
it helps to have an idea of how many Americans will be affected by
the cut, and how strongly they feel about it.
The highly partisan nature of the tax-cut issue is reflected
among the public as well as its representatives. The Senate voted
on the amendment largely along party lines. As Gallup reported last
week, a May poll* found public support for the tax cut as a whole
largely corresponds to party affiliation -- 74% of Republicans
think the tax cuts are a good idea, compared with 30% of Democrats
who share that sentiment.
A January 2003 poll** found support for doing away with the
dividend tax specifically to be only slightly less polarized: 63%
of Republicans said they favored eliminating the tax, as did 31% of
Democrats. Independents fell somewhat closer to the Republicans:
51% favored eliminating the dividend tax, while 43% opposed it.
Overall, by a slim 49% to 44% margin, Americans said they were in
favor of eliminating taxes on dividends.
Who Are Dividend Tax Payers?
How many people actually pay dividend taxes? America is a nation
of investors -- about two-thirds of adults currently say they are
stockowners -- but only 22% of Americans overall, and 36% of
American investors, report paying dividend taxes on stocks.
The president has said that, in addition to small-business
owners, older Americans are particularly likely to benefit from the
dividend tax cut. Indeed, older Americans are more likely to say
they pay dividend taxes (30% of those aged 50 and older, compared
to 18% of those under 50).
But opponents of the cut can point to the fact that Americans
who pay dividend taxes are more likely than those who don't pay
dividend taxes to claim annual incomes of $75,000 or higher (46%,
compared to 14% of those making less than $75,000), and to describe
themselves as "upper" or "upper-middle" class.
The fact that 30% of Republicans versus just 17% of Democrats
have to pay dividend taxes helps explain the greater likelihood of
dividend tax payers to favor Bush's economic policies. But the
attitudinal gap between dividend tax payers and non-dividend tax
payers on this issue does not appear to be extremely wide. While
63% of Americans who have to pay dividend taxes said in January
that they favored Bush's economic plan, non-dividend tax payers
were evenly divided in their views, with 45% in favor and 46%
opposed.
Bottom Line
The ultimate economic impact of the dividend tax reduction will
determine whether it is considered a good idea in the long run. But
as is the case with the larger tax cut, immediate personal economic
gains resulting from the new law will be limited given the fact
that only about one in five Americans pay dividend taxes.
*Results are based on telephone interviews with 1,014 national
adults, aged 18 and older, conducted May 19-21, 2003. For results
based on the total sample of national adults, one can say with 95%
confidence that the margin of sampling error is ±3%.
**Results are based on telephone interviews with 1,002 national
adults, aged 18 and older, conducted Jan. 10-12, 2003. For results
based on the total sample of national adults, one can say with 95%
confidence that the maximum margin of sampling error is
±3%.
