The Dividend LabyrinthWant to rejigger your portfolio to take advantage of the new, lower tax rates on dividends? Good luck. Yes, the tax on dividends was cut by the bill to 15%, as was the rate on capital gains. For taxpayers who were paying rates of 27%, 30%, 35% or 38.6% on dividend income, depending on their tax bracket, the reduction to the new 15% rate could be huge. Could be, that is, as long as the dividends you're collecting are the right kind of dividends. Take the payments that real estate investment trusts (REITs) make to investors. They're not dividends as far as the tax bill is concerned. Investors in REITs will still owe taxes at the higher rates for regular income because the REITs don't pay corporate taxes on the income they distribute to investors.
Tally the Fiscal ScorecardRemember that one of the other arguments for this tax cut was a need to get the economy rolling again. The increase in the size of the federal deficit was portrayed as good policy, because running a bigger deficit in an economic downturn is one way for the government to get the economy rolling at a faster rate. So what's the fiscal scorecard on added stimulus and increased debt? How about a big fat goose egg for stimulus? Economists at ISI Group, a broker-dealer specializing in economic research, figure that the tax cuts could add about 0.4% to economic growth in 2003. But increased taxes and fees from the 50 state governments are likely to cut growth by 0.7%. That's because the states are likely to run a budget deficit of about $85 billion this year, and by law the states have to balance their budgets. For most that means higher taxes because they used up the easy budget cuts and fiscal gimmicks last year to close 2002's almost $200 billion shortfall. So even though the true size of the tax-cut package is closer to $810 billion than to the advertised $350 billion over 10 years, the current economy won't get much bang for all those bucks. (Why $810 billion instead of $350 billion? That's because so many of the current bill's tax cuts are temporary, and the administration's math assumes that Congress will simply allow those cuts to expire and for the older higher taxes to resume.) But the long-term federal budget will certainly pay the price. If Congress lets all these cuts stand for the full 10 years, this bill easily wipes out all the budget surpluses the administration had projected for 2004 through 2013. That's the bad news about this tax-cut bill.