NEW YORK (CNN/Money) -
President Bush will reportedly propose cutting taxes on corporate dividends for shareholders, a move that could bolster the appeal of a stock market heading for a third year of declines.
White House officials are urging Bush to ask for a 50 percent cut in the tax that shareholders pay on dividends, according to Wednesday's New York Times.
Worried about a sluggish economic recovery, the president may float the cut next year as he tries to sell a package of cuts expected to provide as much as $300 billion in reductions over 10 years.
Supporters of cutting the dividend tax argue that profits are taxed twice -- once when companies report them and again as companies distribute them to investors, for whom dividends are taxed as income.
Lowering the tax could encourage companies to raise their dividends, making stocks more attractive than fixed-income securities like bonds, which enjoyed another winning year in 2002.
The Times said a 50 percent cut would cost the Treasury more than $100 billion over 10 years, and the tax benefits would overwhelmingly flow to the nation's very wealthiest taxpayers.
The Times said that administration officials contend that reducing dividend taxes would immediately increase the underlying value of companies and lower their cost of capital.
Still, many economists are skeptical that a cut in dividend taxes would provide much immediate stimulus to the economy, which has been Bush's most important justification for new tax cuts, the paper said. It would be at least a year before shareholders see any extra money, and the measure would not leave extra money in corporate coffers.
The world's most valuable company, Microsoft (MSFT: Research, Estimates), with a market capitalization of $287 billion, pays no dividends. But the stocks of dividend-paying companies have been outperforming those of companies that don't distribute profits to shareholders.
The rich stand to benefit. Under the plan, according to the Times, there would be no upper limit on the dollar value of dividends that would be tax free, which means that most of the relief would flow to the largest investors.
And business groups, the Times said, have themselves often been lukewarm about cutting dividend taxes as well, pushing harder for more direct benefits like faster write-offs on new equipment or reductions in overall corporate tax rates.
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