The Preferential Tax Rate on Dividend Income: Economic Stimulus or Window Dressing

Abstract

This study examines whether the preferential tax treatment of dividend income benefits the U.S. economy and, specifically, incentivizes private firms to increase dividend payouts. Using time-series analyses to contrast the post-2003 recovery against the 1990s, focusing on small- to mid-size business, and regression analysis of confidential Forms 1120, benefitting from special access, our examination indicates that the 2003 dividend tax rate reduction failed to provide a sustained economic stimulus or to increase private firm dividend payouts. This evidence suggests that the dividend tax rate reduction is an ineffective mechanism for stimulating the economy and generating employment opportunities.