Do Tax Cuts Make Cents?

To the Editor:

While visiting Brown to deliver a series of lectures at the Watson Institute for International Studies, I happened to pick up a copy of the March 2003 Brown Spectator. I was pleased to see that, unlike some campus conservative journals, the Spectator relies on argument rather than invective, and is also willing to publish alternative points of view. In the spirit of furthering this intellectual discussion, I would like to submit some comments on the article by Nicholas Ciarcia entitled “Bush’s Tax Cut Makes Cents: In Defense of Dividend Tax Cuts.”

Ciarcia’s assertion that “people in income brackets under $20,000 receive 16 percent of all dividend income . . . those with incomes under $30,000 receive 30 percent of all dividend income” caught my eye. I consulted my colleague Dr. Brian Roach, who has researched this topic thoroughly (see http://ase.tufts.edu/gdae/highlights/Dividend_Taxes.htm). He confirmed my suspicion that this is way off base, despite Ciarcia’s claim that it is based on “IRS data.” Dr. Roach pointed out that:

• IRS data for 2000 available at http://www.irs.gov/pub/irs-soi/00indtr.pdf show that those with adjusted gross income (AGI) under $20,000 received only 7.1 percent of all dividend income, and those with incomes under $30,000 received only 10.6 percent.
• Most low-income taxpayers receive no dividend income at all and, consequently, would receive no benefits from the Bush proposal. Of those taxpayers with AGIs of $30,000 or less, only 15 percent received any dividend income.
• At the top end of the income spectrum, 72 percent of those with AGI’s of $100,000 or more received some dividend income in 2000. These affluent taxpayers (just 8 percent of all taxpayers) received about 63 percent of all dividend income in 2000, and would receive 75 percent of the benefits from repealing dividend taxation.
• Ciarcia’s claim that the “double taxation” of dividends “works out to a 60.09 percent tax rate on corporate profits” ignores the fact that most corporations’ effective tax rates are much lower than the statutory 35 percent, and that less than half of dividend income is taxed at the top personal income tax rate. Also, “double taxation” occurs in many other cases, such as gasoline, cigarette, and state sales taxes, whose impacts fall disproportionately on the poor – yet it is only dividend taxes that seem to arouse the ire of conservative tax-cutters.

Thus, Ciarcia’s assertion that “ending double-taxation of corporate profits will help the poor as much as the rich” is clearly wrong. In addition, by adding to the now huge projected federal deficits, this proposed tax cut would force the government to borrow more in future, putting upward pressure on interest rates and thereby hurting both businesses and consumers. Application of the now-discredited “supply-side economics” theory (that tax cuts lead to higher revenues) created a heavy deficit burden during the Reagan years – let’s not make the same mistake again.