The proposed elimination of taxation on dividends is at best misguided and at worst deceptive, IMO.
The income benefits will go to a small group of high-net-worth people who are more likely to save than spend an incremental dollar. Think about it - suppose someone owns $1MM of dividend-paying stocks with an total dividend yield of 1.7% (which is the average for the S&P500). Eliminating taxation on $17K/yr of dividends gives that person an additional $6K/yr, roughly, of income. But the typical person who owns $1MM of dividend-paying stocks probably also owns >$1MM of other investments, >$1MM of real estate, makes >$0.5MM/yr in income, and so on. How much "whoopee!" does $6K extra bring him? Does he run out and spend all of that $6K? He isn't exactly hurting financially, probably hasn't been depriving himself too much, and he got wealthy in the first place by not blowing every spare penny - he probably pumps very little of that $6K into the economy through increased spending.
The "theoretical" lift to the stock market from eliminating the taxation of dividends is something like 5% to 10%, according to my reading. Well, the market goes up and down more than 10% every quarter anyway, so $500BN seems a pretty expensive way to buy a 5-10% move. That is even assuming that the theoretical boost to stock prices from zero taxation on dividend payouts is not offset by the theoretical drag on stock prices from the higher long-term interest rates that most academics believe will result from higher government deficits.
So what do we get for $500BN of dividend tax cuts? The answer is we get
very little near-term fiscal stimulus to the economy. But we do get a
HUGE Federal government budget deficit to deal with in the future - conveniently, after the current Administration will have left office.
The truth is that the dividend tax cut is not meant to be a fiscal stimulus to the weak economy. It is an
ideological tax cut. The elements in the Republican Party who are currently in control of the Administration tend to ideologically believe in lower taxes, smaller government, and "trickle-down" supply-side economics. The idea is you cut taxes, starve government into shrinking, and - this is the important part - count on money to "trickle down" from the rich to the poor. It is politically difficult to cut top-bracket tax rates, or close rich people's tax shelters, or cut corporate tax rates - but it is easy to cut dividend taxes by promising a benefit to every stock-owning American. This is an ideological tax cut that is being misleadingly "sold" to Congress and voters as an economic stimulus.
Admittedly that's just my view. For the view of someone with just a little more credibility - he's merely one of the greatest investors of all time and one of the world's richest men - see these comments by Warren Buffett at
http://www.washingtonpost.com/wp-dyn/articles/A13113-2003May19.html - Buffett calls the tax cut "voodoo economics" and concludes that "Supporters of making dividends tax-free like to paint critics as promoters of class warfare. The fact is, however, that their proposal promotes class welfare. For my class."
So, this has all been pretty abstract and big-picture. If you want to get specific about the benefits - to go from the abstract "we" to the particular "you" - then here is an exercise. Add up all the individual stocks and stock mutual funds that you own outside of a 401k (because dividends on stocks owned in a 401k are not taxed anyway). Add up the dividend yield (or use the S&P500 average of 1.69%). Multiply by your tax rate (or use a typical 35%). That's the benefit to you. For most of us, it's probably less than the cost of one Bilstein shock. So you can weigh the benefits of a shock, or maybe half a shock, today versus the future prospect of living in a country struggling with multi-trillion-dollar budget deficits.
For some numbers on the budget deficit, search Google "federal budget deficit" or see this article :
http://www.washingtonpost.com/wp-dyn/articles/A4599-2003May17.html
"The Congressional Budget Office forecasts a $300 billion deficit this fiscal year -- an all-time record -- while the investment firm Goldman Sachs says a more realistic number is $425 billion. That's edging close to a troublingly high percentage of the economy. But the real problem is not this year or next. Rather, it's the long-term cost, combined with the budgetary hit just around the corner, when the baby boomers start to retire and put new demands on Social Security and Medicare. The administration highlighted this problem in its own budget documents, describing "the real fiscal danger" as the $18 trillion shortfall -- yes, trillion with a "T" -- projected in those two programs, an amount equivalent to nearly half the household wealth in the United States last year."