Bush's Dividend Plan Won't Yield Great Results

Let's examine the individual investor side. About 50% of all the dividends distributed avoid immediate taxation, according to William Gale, a senior fellow at the Brookings Institution. Dividend-paying stocks held in pension funds and other tax-deferred plans, such as 401(k)s and IRAs, are not taxed when they're distributed to such plans. Rather, the dividends (just like all the other money in those plans) are taxed when the individual withdraws money from the plan.

Bush's proposal won't help dividend-receiving investors in tax-advantaged accounts, because this fact wasn't addressed in the plan. Only individuals who invest directly in stocks or dividend-paying mutual funds -- and not those who invest via retirement accounts like IRAs or 401(k)s -- will benefit under the current proposal.

Senior Discount

But what about all those seniors the dividend exemption will help? Let's dispense with that myth. Somehow, we've been conditioned to think of senior citizens as a class of people struggling to get by on meager Social Security checks and a fixed pension. While that description may fit an unfortunate number of the elderly, it does not describe those invested in dividend-paying stocks.

Indeed, estimates from the Brookings/Urban Institute Tax Policy Center indicated that 41% of the benefits of a dividend exemption would go to those over age 65. But the Center on Budget and Policy Procedures took a closer look at that figure and learned that the bulk of the benefits going to senior citizens is also going to some mighty well-off citizens.

Nearly 40% of the benefits that would go to the elderly would go to seniors with incomes exceeding $200,000 a year. That means that 40% of the benefits going to the elderly are aimed at just 2.5% of the country's elderly population.

The Center on Budget and Policy Procedures also found that nearly 75% of the benefits that Bush rightly claims are going to the elderly are going to seniors with annual incomes of more than $75,000 -- or 19% of the elderly.

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