When the President unveils his new economic growth package on Tuesday, at the center of the initiative will be an idea that was not anywhere on the political map just four months ago: the elimination of the double-taxation of dividend income. And despite the over $100 billion price tag of the supply-side proposal, enough Democrats are likely to support it to give Bush a comfortable margin of victory on the high-profile tax cut aimed squarely at the increasingly important “investor class.”
Scrapping the taxes people pay on dividend income would have a tremendous impact on a wide swath of the American public. But if the dividend tax is such a common levy that tens of millions of Americans cough up each year, why did eliminating it not gain any political traction until very recently? In a town where issues come and go, but none rise to the top overnight, the rapid ascent of the push to scrap the dividend tax seems to have resulted from a combination of powerful backers and old-fashioned lucky timing.
Although Republicans have, for several years now, been courting investors, Democrats are eyeing what they see as a constituency that could put them back in power in Washington. Democrat pollster Mark Penn last summer found that that are now more people who own stocks than hold jobs among the electorate, by a margin of 66%-53%—transforming the old mantra of “jobs, jobs, jobs” into “stocks, stocks, stocks.”
Shortly before the November elections, the GOP pushed through the House two modest tax cuts as a show of solidarity with investors. But eliminating the dividend tax was not even floated as a possibility, let alone included in the final package. But one suggestion from a well-known Wall Street player to the President got the ball rolling.
At the economic summit in Waco, Texas this August, Charles Schwab—a familiar figure to millions because of his brokerage house and the commercials he has done—told President Bush that the double taxation of dividends should end. In his trademark brevity, the President replied, “That makes a lot of sense.” Within a couple months, the idea found backers in now-axed White House economic guru Lawrence Lindsey and a number of conservative activists inside the beltway, including Americans Tax Reform (ATR) president Grover Norquist.
Eliminating the dividend tax has enormous appeal because it touches so many voters, and it has the virtue of being an easy sell. Dividends are taxed twice, once when the corporation declares profit, and again when the investor receives his cut. For example, if Corporation A has $1,000 in profit to pay out in dividends, it would first pay Uncle Sam $350, and then Joe Q. Stockholder would have to pay up to $253 in taxes on his $650 dividend—meaning Uncle Sam siphons off up to 60% of the original $1,000 profit. No wonder the number of companies paying dividends has plummeted.
Junking the dividend tax has also gained traction in large part because it doesn’t carry the baggage other types of tax cuts do. Zeroing out the capital gains tax, for example, would be immediately blasted as a giveaway to the rich—an attack that already has built-in appeal because it has been trotted out before. But getting rid of the dividend tax has no such history.
The dividend tax is one paid in large part by the middle-class and senior citizens. Roughly half of dividend recipients are in households with less than $50,000 annual income, and more than half of dividend income goes to people over age 65. In other words, it’ll tough for Democrats to oppose President Bush’s initiative—if not downright foolish.
The only variable at this point is that the White House may only propose a 50% cut in the dividend tax because of the “cost” of the full monty. But as ATR’s Norquist explains, killing the tax is an easier sale to make because “eliminating the dividend tax is a principle, but cutting it in half will come across as special pleading, asking for a favor.” And in the new political reality where there are more stockholders than jobholders at the voting booth, eliminating the dividend tax is one principle the President would be smart to fight for.