01:00 AM EDT on Wednesday, April 14, 2004

PRESIDENT BUSH'S PROPOSAL to end the "double taxation" of dividends was "simple, moral and innocent," Donald Luskin wrote a year ago on the National Review's Web site. Weeping into his keyboard, Luskin likened the plan to the idealistic James Stewart character in Mr. Smith Goes to Washington. The proposal, he said, "got corrupted, chewed up, and spit out by the U.S. Senate."

Over at the Heritage Foundation, Daniel J. Mitchell was predicting that Americans would reject the "politics of hate-and-envy" and go for the Bush plan. "Business will still pay tax on corporate income," he said, "but individual stockholders no longer would have to pay a second layer of tax on that income when it's distributed as dividends."

Guess what. Dividends were never really taxed twice, because corporate income was hardly taxed once. Economists already knew that companies were paying nowhere near the basic federal corporate-tax rate of 35 percent. A new General Accounting Office analysis shows that their tax burden was even lighter than the experts had dreamed. So all these sob stories were a myth and a con.

Rescuing investors from their alleged persecution, Congress cut the tax rate on dividends to 15 percent, from a high of 38.5 percent. Even more significantly, it lowered most taxes on capital gains to 15 percent. (How we tax capital gains, the rise in the value of stock, is another tearful tale for a rainy afternoon.) The bottom line is that middle-class workers now pay a higher tax rate on the money they sweat for than stock investors pay on their share of company profits.

The GAO says that for 1996 through 2000, most U.S. corporations did not pay a penny of income tax. Of the biggest companies ($50 million or more in revenues), 45 percent paid no tax on earnings in 2000. Another 35 percent paid less than 5 percent. What's more, these five years were boom times, when corporate profits flowed like agua over Niagara.

How did they avoid paying taxes? Through "a variety of tax-dodging strategies," as The Wall Street Journal put it. By 2003, corporations accounted for just 7.4 percent of federal revenues, the lowest rate since 1983.

When companies and their stockholders get off the hook for taxes, others must pick up the slack. Who might that be? Who gets to pay extra for farm subsidies, national defense, Medicare and other government programs?

The working Joes and Janes, of course. Federal taxes are withheld right from their paychecks. There are no secrets between them and the IRS. Corporations can hide, defer or otherwise work black magic on their reported incomes. Not Joe and Jane.

But, hey, haven't we become a nation of investors? Don't ordinary people now own stock and so benefit from tax breaks for dividends? No, they do not. Just over half of all Americans own stock, but nearly all of it is held in retirement plans, where dividends don't get taxed anyway.

Only 1 in 10 filers with incomes in the bottom 80 percent report taxable dividends, according to Bob McIntyre, at Citizens for Tax Justice. Of that tiny group, dividends average only $1,500. The top 1 percent in income reports an average $45,000 in dividends.

Let us issue a whimper or two over other forms of double taxation that are very real and affect Joe and Jane. First they pay taxes on their wages. Out of that already-taxed income, they pay Social Security and property taxes. When they take what's left to the store and buy something, they might pay sales taxes.

Contrary to the propaganda, lowering dividend taxes does little to spur economic growth. Dividend-tax cuts fall dead last on Economy.com's list of federal policies that might stimulate the economy. (Number one is increasing state aid.)

So America hasn't been breaking the backs of its poor little stock investors after all. And cutting their taxes doesn't do any more for the economy than cutting anyone else's. It only pushes more of the tax load on Joe and Jane.

The big break on dividend taxes turns out to be just another trinket slipped into the rich man's goody bag. And it couldn't have been done without all those histrionics over the unfairness of it all. Nice work, boys.

Froma Harrop is a Journal editorial writer and syndicated columnist. She may be reached by e-mail at: fharrop [at] projo.com.