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Business Chronicle: Will a US dividend tax help economic growth ?

On 7 January 2003, US President George W. Bush announced a package of tax cuts with the hope that, when implemented, the tax cuts will stimulate the currently slow US economy.

The centerpiece of this plan is to eliminate the taxes investors pay on dividend income. The issue has become hotly debated: Some feel the tax cut will revitalize a sagging economy and stock market; others believe most of the benefits will go to a few wealthy investors, and this tax cut will hurt the middle and lower class.
But this plan may face some problems with the companies that earned money outside the US and paid taxes in another country on the profit, so they could get credits on US taxes, and the income then could be added to the profit excluded from taxation when paid out as a dividend.

Even so, any foreign-earned income reinvested in a company’s foreign operations did not count towards its so-called excludable dividend amount, or the amount of net income that could be distributed tax free.

Also, it is expected cutting the dividend tax will be a tonic for the stock market, but this proposal could make stocks a more attractive investment than the bonds issued by states and municipalities for building schools, roads and other projects. To attract investors, local governments might have to offer higher interest rates on their bonds, and that would make it more expensive for them to borrow money.

It is difficult to forecast the effect on the bond market. But in the long term, it may be an even larger impact because borrowing costs always are increasing.

But, some analysts see concerns about the bond market may be exaggerated, that’s because tax-free government bonds generate guaranteed income for investors. There is no guarantee that stocks will return dividends—tax-free or not.

Here we assume the US Administration sees easing the tax as a first step toward tax reform and also to move toward a system that taxes consumption more than investment but, there will be so many questions asking why they want to cut the dividend tax instead of another tax? And what effects will the dividend tax cut have on the stock market, the bond market, and the economy as a whole? n

Khair Mikkawi

Khair Mikkawi is a financial consultant based in Riyadh. He contributed this article to The Star

Amman,03 24 2003
Khair Mikkawi
The Star
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