Dividend Tax Cut

Told only like John Irons at ArgMax can tell it.

T minus 9 days
Nine days until default….

The Senate is currently considering a $1 trillion increase in the debt ceiling, which now stands at $6.4 trillion. Just last year Congress and the President boosted the debt limit by $450 billion.

If Congress does not pass the debt-limit increase by May 28th, the government will not be able to meet its obligations to, among other things, pay social security recipients, make tax refunds, etc.

And Congress is about to pass, and the President is about to sign, the third largest tax cut in history - in the form of a dividend tax cut - that will have very little effect on the economy in the short run…

(Why a $1 trillion increase in the debt? And not something like last years’ 450 million? Well, at the rate of current deficits, that ought to last for the next couple of years, until the end of 2004 at least…)

Senate Passes Tax Cut
The Senate republican tax plan, which passed yesterday, will phase-in a dividend tax cut, and then repeal it after three years.

The Senate plan calls for the dividend tax will be cut by 50% this year, and fully eliminated for 2004, 2005, 2006 and then reinstated for 2007 and beyond.

The sole reason for this gimmick is to reduce the cost below the previously agreed $350 billion, and hence to make the bill filibuster-proof. The true cost of the permanent tax reform is thus much greater than $350 billion.

The additional problem is that the phase in is terrible economics. As a company, will you pay out dividends this year, when they will be taxed at 50%, or next year, when they will not be taxed at all?

The likely result is a large reduction in dividends this year - exactly when we need economic stimulus.

He also has a graph showing who benefits from the dividend tax cut.

(AG) Income Class Average Tax Change
Less than $10,000 -2
$10,000-$20,000 -97
20,000-30,000 -225
30,000-40,000 -324
40,000-50,000 -445
50,000-75,000 -688
75,000-100,000 -1,597
100,000-200,000 -2,497
200,000-500,000 -4,997
500,000-1,000,000 -15,452
More than 1,000,000 -73,790
All -692