Surprise! Tax cuts on dividends primarily go to super-wealthy.

When George W. Bush was out selling the tax cuts on dividends he tried to sell it by claiming that half the savings would go to elderly retirees. Now that Congress is considering making those tax cuts permanent, the New York Times has made a study of who actually got the benefits. Surprise! It hasn't been retirees.

An analysis of Internal Revenue Service data by The New York Times found that the benefit of the lower taxes on investments was far more concentrated on the very wealthiest Americans than the benefits of Mr. Bush's two previous tax cuts: on wages and other noninvestment income.

When Congress cut investment taxes three years ago, it was clear that the highest-income Americans would gain the most, because they had the most money in investments. But the size of the cuts and what share goes to each income group have not been known.

As Congress debates whether to make the Bush tax cuts permanent, The Times analyzed I.R.S. figures for 2003, the latest year available and the first that reflected the tax cuts for income from dividends and from the sale of stock and other assets, known as capital gains.


The analysis found the following:

• Among taxpayers with incomes greater than $10 million, the amount by which their investment tax bill was reduced averaged about $500,000 in 2003, and total tax savings, which included the two Bush tax cuts on compensation, nearly doubled, to slightly more than $1 million.

• These taxpayers, whose average income was $26 million, paid about the same share of their income in income taxes as those making $200,000 to $500,000 because of the lowered rates on investment income.

• Americans with annual incomes of $1 million or more, about one-tenth of 1 percent all taxpayers, reaped 43 percent of all the savings on investment taxes in 2003. The savings for these taxpayers averaged about $41,400 each. By comparison, these same Americans received less than 10 percent of the savings from the other Bush tax cuts, which applied primarily to wages, though that share is expected to grow in coming years.

• The savings from the investment tax cuts are expected to be larger in subsequent years because of gains in the stock market.

[Snip]

Because of the tax cuts, even the merely rich, making hundreds of thousands of dollars a year, are falling behind the very wealthiest, particularly because another provision, the alternative minimum tax, now costs many of them thousands and even tens of thousands of dollars a year in lost deductions.

By contrast, few taxpayers with modest incomes benefited because most of them who own stocks held them in retirement accounts, which are not eligible for the investment income tax cuts. Money in these accounts is not taxed until withdrawal, when the higher rates on wages apply.

Those making less than $50,000 saved an average of $10 more because of the investment tax cuts, for a total of $435 in total income tax cuts, according to the computer model.

During last week's debate on whether to restore limits on the alternative minimum tax or make permanent the cuts in investment income taxes, House leaders chose as their spokesman Representative David L. Camp, a Michigan Republican. He said Republicans favored continuing investment tax cuts because that would help more people and would especially benefit those making less than $100,000.

"Nearly 60 percent of the taxpayers with incomes less than $100,000 had income from capital gains and dividends," he said on the House floor.

But I.R.S. data show that among the 90 percent of all taxpayers who made less than $100,000, dividend tax reductions benefited just one in seven and capital gains reductions one in 20.

Mr. Camp, who had said in an interview that his figures were correct, said Monday through a spokesman that he had been misinformed by the staff of the House Ways and Means Committee. But his office said he supported making the investment tax cuts permanent because cutting these rates was "good policy and good for our economy." [Snip]

The Congressional Budget Office estimated that making the investment tax cuts permanent would cost the government $197 billion over 10 years. But advocates of eliminating taxes on investments say there is no cost to the government because lowering taxes on such income encourages more investment, which should lead to more and higher-paying jobs. Taxes on wages from those jobs should more than offset the tax savings to investors, said Mr. Entin, an advocate of eliminating taxes on most investment income as a way of promoting economic growth.

However, the Congressional Research Service, an arm of Congress that analyzes issues, concluded in a January report that lower taxes on investment income may translate into lower savings because people need fewer investments to earn the same after-tax income. In another report, the research service showed how lower taxes on investment income can encourage investment outside the United States, creating jobs, but not for Americans.

The argument that lowering taxes on dividends will lead to more investment assumes that lack of investable funds currently limits investment. The fact is, there is plenty of investable money to fund investment. The problem is that the most profitable investments are outside the United States.

Nothing about the tax cuts on dividends assures that the money will either be invested, that it will be invested in the U.S. rather than other companies, or that the money will create new jobs.

There is also no indication that the tax cuts have had any effect on the U.S. economy. The mild increase in the U.S. GDP can instead be attributed to the normal cyclical recovery augmented by the extremely low interest rates the Federal Reserve maintained until 2004. The increase in the GDP also has NOT provided enough new jobs for the increased population entering the work force. The result has been a decrease in the workforce participation rate.

The tax cuts on dividends should not be made permanent. The nasty effects of the federal deficit will soon swamp even the most rosy scenarios offered by those politicians who are buying their relection by starving the government of the money it must have to continue functioning.