Seniors Benefit from Capital Gains, Dividend Tax Cuts

Published February 1, 2006

In the Congressional fight over whether to preserve cuts in capital gains and dividend tax rates, there’s one group of beneficiaries that has been largely overlooked: retired seniors who rely on investment income.

“Most supporters of tax-cut extensions focus on how it will boost the economy, while opponents argue they’re simply ‘tax cuts for the rich,'” said Scott A. Hodge, president of the Tax Foundation. “Few have actually explored how retired Americans and workers saving for retirement benefit from those tax cuts.”

The centerpiece of the 2003 Bush tax cut was a hefty reduction in capital gains and dividend tax rates, from 20 percent for capital gains and as high as 35 percent for dividends, down to a uniform rate of 15 percent. Both cuts will expire after 2008 unless Congress acts.

According to a December 2005 study from the Tax Foundation, the percentage of senior citizens who rely on capital gains and dividend income is higher than for any other age group. That suggests extending the reduced tax rates on capital gains and dividends would significantly benefit retirees and taxpayers on the verge of retirement.

Not Just Wealthy Benefit

Critics of the tax cuts have argued they’re a boondoggle benefitting only wealthy taxpayers. But IRS data cited in the Tax Foundation study suggest the temporary 15 percent tax rate on capital gains and dividends benefitted millions of middle-income taxpayers.

Hodge estimates more than 80 percent of taxpayers who claim dividend income earned less than $100,000 in 2004. The percentage is similar for capital gains income–76 percent. More than half of all taxpayers age 65 or older claim dividend income.

“Because of the ‘graying’ of America and the trend toward stock ownership by middle-income people, recent cuts in the tax rates on capital gains and dividends have provided welcome relief to millions of middle-income elderly,” said Hodge.

Critics Call Cuts Unfair

But not everyone agrees. Critics of the tax-rate cuts have accused Republicans of fiscal irresponsibility and of unfairly cutting taxes for the wealthy.

“The country cannot prosper in the long run with persistent large budget deficits and a large trade deficit,” said Sen. Jack Reed (D-RI), ranking Democrat on the Joint Economic Committee, for a December 14 MarketWatch report by Rex Nutting. “Middle- and low-income families are being asked to pay the price for tax cuts for the wealthiest.”

Similar criticisms have plagued the capital gains and dividend tax cuts since their passage in 2003. Congressional Democrats have repeatedly questioned the cuts because the bulk of their benefits accrue to high-income taxpayers. In response, Bush administration officials have typically citied strong economic growth and capital formation since the cuts went into effect.

Cuts Help Elderly

For example, in a statement following a House vote in December to extend the tax cuts, Treasury Secretary John Snow said, “Lower tax rates on savings and investment have benefitted millions of Americans of all income levels either directly, through lower taxes on investment returns, or indirectly through new and better jobs and greater economic security for families.”

The Tax Foundation study provides support for the cuts beyond an improved economy. The study shows how cuts in capital gains and dividend tax rates benefit millions of elderly Americans at precisely the time when they rely most strongly on these forms of income.

“Focusing on current income distributions when deciding whether or not to extend the lower rates on dividends and capital gains provides little information about who benefits from these policies,” said Hodge. “It’s clear that these policies significantly benefit older Americans, who are growing in numbers each year.”

Andrew Chamberlain ([email protected]) is staff economist at The Tax Foundation.

For more information …

The Tax Foundation study, “Majority of Seniors Benefit from Reduced Capital Gains and Dividend Tax Rates,” is available online at