Show Me the Money! Dividend Payouts after the Bush Tax Cut

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The centerpiece of President Bush's tax cut in2003 was a sharp reduction in the individual dividendtax rate. The dividend tax cut was designedto spur investment and boost the stock market byincreasing the after-tax return on corporate earnings,thus raising stock valuations. The tax cutalso reduced the tax bias against dividends tospur larger payouts to shareholders. That reducesthe amount of discretionary cash available toexecutives and will likely reduce the number ofEnron-style corporate financial scandals.

This study examines the impact of the dividendtax cut after one year. We gathered data ondividend payouts before and after the 2003 taxcut for all Standard & Poor's 500 companies. Wefound a highly positive response to the tax cut:

  • Annual dividends paid by S&P 500 companiesrose from $146 billion to $172 billion,an increase of $26 billion.
  • In addition, special dividends of $7 billionhave been paid, raising the total first-yeardividend increase to $33 billion.
  • Thus, dividends increased 18 percent withoutspecial dividends and 23 percent withspecial dividends.
  • Twenty-two companies that did not previouslypay dividends have initiated regulardividends.
  • Equity values rose more than $2 trillionafter the tax cut.

The large and positive response to the dividendtax cut, which is scheduled to expire at theend of 2008, suggests that Congress shouldmake it permanent.

Stephen Moore and Phil Kerpen

Stephen Moore is a senior fellow at the Cato Institute. Phil Kerpen is a research fellow at the Club for Growth.