George W. Bush’s Proposal to Cut Dividend Taxes from Individual Income
...dividual’s income looks to ignite new interest in the Market and give the economy a long over-due push. “Roughly 35 million American households” will benefit from this break. Forty percent of these families earn less than $100,000 a year. (Taking Action) Allowing taxpayers to exclude dividend payments from their taxes will filter even more money back into the hands of consumers. The White House says that other benefits to the dividend tax cut would be the forecast that “stock prices will increase by at least ten percent … This would lead to a $20 billion boost to market, this year alone.” According to an article by Stephen Moore of the Washington Times, respected Wall Street economist John Rutledge would agree. Moore says Rutledge, a former Reagan administration economist, estimates the rising value of stock by at least ten percent as well, “which is good news for the 85 million American shareholders.” Moore goes on to give the estimates of Gary Robbins of Fiscal Associates, which say that “a dividend tax cut will increase gross domestic product by at least $5 for every $1 of the reduced tax receipts.” Pushing up share prices and erasing some paper losses may give some encouragement to investors and make them feel a little wealthier. “Financial planners say the proposed tax cut could have far-reaching effects on investment strategies, making stock with a payout more attractive.” (Yen) This newfound confidence would have consumers invest more and give them the hope for a brighter economic future. The Monday following Bush’s televised proposal, there was an “enthusiastic reaction on Wall Street…with key market indexes gaining 2 percent. The Dow Jones Industrial Average closed a 8,773.57, up 171.88 points.” (Huntley) This was good sign to a positive acceptance of Bush’s new ideas. The average person feels as though any tax cut is a good tax cut. It is hard to go wrong when you are returning money to the public. From an article at CNN.com, Bush was quoted saying, “The government ought to be content with taxing revenue streams or profits one time, not twice. And in dividends, we tax the corporate profit and then we tax the money being sent to the shareholder. That doesn’t make any sense. That’s unfair. That’s bad public policy.” Unfortunately, though it may have won him some support there are still many people in the market with real questions and with some foreseen problems that may be inevitable if the Congress decides to proceed with the plan. Though this proposal can seem like the answer to our suffering economy, more tax cuts, especially in the wrong places, could hurt more than help. Eliminating the tax on dividends appeals to the typical taxpayer and is easier to sell than the economically more appropriate method. However, in this case, this cut needs to be re-evaluated. Once passed, Bush’s plan looks to stimulate the stock market and make corporate shares look more appealing. According to Mike Moffatt from economic department of About.com, “incomes are not likely to increase a lot in the short-term. Thus, if investors are buying more stocks, the must, necessarily, be buying less of something else. It is likely that consumers will buy less of the good that is the closest substitute of stocks, and for most consumers that good is bonds.” Going back to basic economic principles and the supply and demand curves, we can see that when something is in high demand, the price goes up. This is what will happen to stocks. In the case of bonds, their values will go down because they will be a lot less desirable to the public when up against a stock that promises them more money. The only way to balance this and continue to keep the bond market flowing would mean to promise its consumers higher returns as well. Without this balance the bond market may suffer great losses. This possibility of a downturn leads to an increased interest rate on bonds. The interest rate on a bond relates inversely to its price. “Some experts believe that by eliminating dividend taxes, demand for stock dividends will grow as a form of fixed income rather than interest paid by holding bonds, and [as] more investors move out of the bond market and into the stock market, interest rates will go up to compete for investors.” (Chilinguerian) According again to Moffatt, “since interest rates tend to be calculated based on Prime and the likelihood of the borrower to go bankrupt, there is a perfect relation between them and the prime rate. The prime rate is the interest rate at which banks lend money for a specified short-term.” With interest rates high, many people would often put off borrowing money from banks for things such as houses or cars. With big loans like mortgages, consumers would rather wait for the best deal they could get and an interest rate they can pay off as soon as possible. Unfortunately, “rising interest rates could stop the hot housing market in its tracks, just as increased rates on auto loans would make people decide to drive their old car a little while longer than they’re inclined to do today.” (Tomchick) This effect seems to completely counterbalance the good the plan could do. If people are not spending as much, it results in lower profits. These lower profits combined with the increased interest rates companies will be paying banks for loans “could start a second wave of corporate bankruptcies.” (Tomchick) This interest rate effect has also left our state and local governments worried. “To attract investors and compete with dividend-paying stocks, municipal bond interest rates would have to rise. State and local govern...