Credit Where it’s Due

In this instance, to Sen. Charles Grassley (R-Iowa) who, given that a $350b tax cut is a fait accompli, actually came up with a pretty reasonable proposal on dividend taxes:

Bush says his proposal to eliminate dividend taxes would boost stock prices and create jobs [on this point, see my earlier post]. Committee Chairman Charles Grassley, an Iowa Republican, negotiated with key Republican moderates to develop a compromise that would fit elements of Bush’s original $726 billion, 10-year plan into a $350 billion total approved by the Senate.

The compromise bill would exempt the first $500 of dividend income from taxes, which Grassley said would eliminate such taxes for 86 percent of dividend-receiving taxpayers. An additional 10 percent of dividend income above $500 also would be excluded from taxes, with that rising to 20 percent in 2008 through 2012.

Only the pretty well off will have non-sheltered (i.e., non-IRA) dividend income over $500, so those who pay any dividend taxes under this plan will mostly be people in the 34% and 37.6% 2004 brackets, meaning that even with a 20% exclusion they will pay a net tax rate on dividend income of 27%-30%. The rest of the dividend-receiving population will pay much less, zero or nearly zero. Insofar as there are some benefits to not taxing dividends, this strikes me as a reasonable way to reduce the distortion. Nevertheless, this is still a bigger tax cut for the wealthy, to the extent that they derive a greater percentage of their income from dividends than do the less wealthy (they’ll be paying 30% on income that they previously payed around 35% on).

Also note that this proposal is not Bush’s plan; it’s just the best he can get without Snowe, Voinovich, Collins, and Chafee (Zell Miller can only sell out once). Were Bush’s plan implemented, I assure you it would be regressive.