History

• The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) reduced the tax rate on certain dividends paid to investors. This made purchasing stock in dividend-paying companies more attractive, therefore more corporations started paying or increased their dividends.
  
  

Time Frame

• The bill became effective May 28, 2003. The lawmakers included a sunset provision in JGTRRA that provides for the revoking of this tax relief in 2008. Thus providing investors with approximately five years of lower tax rates on dividends unless lawmakers decided to extend the provision. The Tax Increase Prevention and Reconciliation Act of 2005, passed in 2006, extended the relief through 2010.
  
  

Effects

• There was an immediate effect upon the passing of JGTRRA in that U.S. corporations increased dividends. High-dividend firms saw their stock prices rise. Surprisingly, non-dividend paying firms also saw their value rise. It has been suggested that this is due to the direct correlation between taxation and spendable income. When people have more money, they spend more.
  
  

Considerations

• Since the dividend tax relief did have the effect that the Bush was looking for, and may have even outpaced the benefits they hoped to gain, it would seem that Congress would be quick to make this tax relief permanent. However, Congress in 2009 has the alternative minimum tax to consider, which will essentially undo the tax reductions unless Congress acts. Additionally, Congress must take into consideration the current budget deficiencies, public opinion, and the effects on other bills currently active.
  
  

Benefits

• According to the sources cited here, the true beneficiaries of the dividend tax relief enactment were the American taxpayers (see References). When taxation of dividends went down, the cost of capital lowered for corporations who responded by increasing their dividends. Their stocks prices went up because more investors were buying. This increased corporate capital and lowered costs, enabled the firms to spend more, and boosted the economy. Some economists find that this improvement in economic conditions meant more jobs, thus adding to government coffers by way of income tax payments and bringing down the deficit.