What is a dividend?
A dividend is a taxable payment declared by a company’s board of directors and given to its shareholders out of the company’s current or retained earnings, usually quarterly. Dividends are usually given as cash, and they provide an incentive to own stock in stable companies even if they are not experiencing much growth. Currently about 75% of companies in the S&P 500 pay dividends.

What is a capital gain?
A capital gain the amount by which an asset’s selling price exceeds its initial purchase price. A tax on capital gains is owed if a seller makes a profit on an investment. Profits on the sale of mutual funds, bonds, options, collectibles, homes, and businesses can be subject to the capital gains tax.

How does a lower tax rate on dividend income encourage savings?
Because dividend payments are reinvested as much as 50% of the time, investors receiving dividends are able to save more when they have a smaller tax burden. The lower tax rate on dividends has also contributed to the growth in dividend payouts which ultimately leads to more consumer saving.

Why does the 15% tax rate need to be extended now even though it doesn’t expire until 2008?
Research has shown investors make decisions based on long-term estimates of the performance of their holdings. The short duration of the life of these cuts lessens their effect on investment, even prior to the 2008 sunset of the law.

Is this a tax cut for the rich?
No. In 2002, the latest year for which data is available, almost 2/3 of taxable returns with dividend income were filed by Americans with adjusted gross incomes under $75,000 who had average dividend income of about $1700. Moreover, dividends are particularly important for millions of senior citizens; according to an AARP analysis of IRS data, close to 50% of all dividends are received by Americans over the age of 65.

How does the lower tax on dividend income help improve corporate governance?
The lower rates are imposing on companies the “discipline of the dividend.” Investors’ increased appetite for dividends has forced companies to demonstrate profitability with the most transparent form of proof – cash payments to shareholders. Likewise, the drive for dividends encourages companies to undertake only the most profitable investments.

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