Putting a Face on Dividend Earning Taxpayers

January 6, 2003

Fiscal Fact No. 1

Tomorrow, President Bush will propose a tax break on dividends as part of a larger economic stimulus plan. In years past, the tax treatment of dividends has varied from fully exempt to fully taxable, and they’ve been fully taxable since 1985. Moreover, dividends are taxed as income to corporations before they’re ever issued to shareholders, then taxed as income to the individuals who receive them. It is widely acknowledged that this double-taxation causes companies to issue far fewer dividends than they would in the absence of the tax.

The most immediate effect of eliminating the double tax on dividends would be a redirection of investment into firms that pay dividends. Many economists believe that investors who receive dividends put less pressure on companies to achieve short-term increases in share prices, and that this change will be a positive development in the effort to improve corporate governance.

According to the most recent IRS data, 34.1 million tax returns contained some dividend income in 2000. This represents 26.4 percent of total tax returns. Dividend income in 2000 totaled $142.2 billion, or 2.2 percent of total income reported by all taxpayers in that year.

Despite widespread belief to the contrary, dividend income was earned by taxpayers across the income spectrum. In fact, of all taxpayers that claimed some dividend income in 2000, nearly half (45.6 percent) earned less than $50,000 in adjusted gross income (which includes dividends). [See Figure below]. Moreover, 63.6 percent of those taxpayers claiming dividends earned less than $50,000 in just wages and salaries.

Another important factor to remember is that a tax return is a piece of paper that can represent a single person, a family, or even a business. Therefore, it is important to look at the number of people affected by a change in tax law, not just the number of returns affected. While “only” 34.1 million tax returns claim some dividend income, these returns represent 71.1 million people. Also, 13.1 million returns with some dividend income also had some self-employment or small business income reported.

1999

2000

% Increase

All Returns

127,129,451

129,271,972

1.7%

Number of returns claiming dividends

32,216,236

34,099,368

5.8%

Amount of dividends claimed ($ Thous.)

$ 129,749,161

$ 142,213,575

9.6%


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