Dividend tax break costs Treasury $125 billion

Some investment income taxed at lower rate than poor's wages

Author: Ronald J. Hansen and Melvin Claxton

Published: September 28, 2004

It is a tax cut worth enough to triple the spending on low-income energy assistance through 2008.

The Bush administration?s cut on capital gains and dividends - totaling $23 billion since 2001 - is a tax break on investment, not work.

Dividends are the cash given to shareholders from a company?s profits. Capital gains are the profits made after selling an asset that has appreciated in value.

Before the Bush cuts, the taxes on dividends and capital gains ranged from 10 percent to 20 percent. The cuts reduced this range to 5 percent to 15 percent.

Investors from the lowest income brackets pay at the 5 percent rate. This income is now taxed at a lower rate than the payroll taxes of wage earners in poverty.

The White House said the tax cuts would promote investment by individuals and businesses that will lead to economic growth and job creation.

The cuts, scheduled to expire in 2008, are expected to cost the treasury an estimated $125 billion over their lifetime.

Capital gains accounts for the bulk of the cut.

In pushing the tax breaks, President Bush said the dividend cut would benefit millions of seniors.

?The good news is that a lot of seniors rely on dividend income to meet their daily needs,? Bush said in 2003. ?And under this legislation, 12 million seniors will receive an average tax reduction of $1,401.?

Most seniors never saw this money.

One in two seniors over 65 will get no tax break, and 60 percent of the elderly will receive less than $100, according to estimates by the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution, comprising experts in tax, budget and social policy.

The $1,401 is an average that includes those in the very top income bracket. The 24,000 elderly with incomes in excess of $1 million will receive an average tax cut of over $90,000.

The wealthiest 1 percent of Americans own more than 47 percent of all stock. The bottom 40 percent own about 4 percent. Internal Revenue Service data shows that fewer than 7 percent of tax filers typically claim income from dividends or capital gains on their returns.