Public Advocacy, Grassroots Organizations and Snake Oil

The Internet and email have made it very easy for small groups of people to organize large numbers of voters to influence legislative policy priorities. Unfortunately, what are essentially special interests are able to portray themselves as general interests. The effort usually starts with a small group or industry who will benefit, a narrative that distorts the special interest portraying it as a general interest and the commissioning of studies by reputable organizations which develop creditable but biased data to support the narrative.

A case in point is the supposedly grassroots organization Defend My Dividend which is flooding the bandwidth with commercials requesting voters to contact their representatives to demand that federal tax rates on qualified dividends (dividends on stock owned for one year or more) not be increased. Starting with the 2003 tax cut legislation, the tax rate on qualified dividends was reduced to 15% (0% tax for people in the 15% tax bracket or lower). If no change is made, the tax rate on qualified dividends will revert to the rate that existed prior to the 2003 tax law change which taxed dividends at the same rate as ordinary income (wages, salaries, savings account interest, etc.). The Obama administration is proposing that the reduced rates only be retained for married tax payers with less than $250,000 in annual income ($200,000 for single tax payers) starting in 2011.

The Defend My Dividend organization was organized by several major utilities. On their web site, a major justification for not raising the rate is that it is a myth that the lower rate only benefits wealthy tax payers. The organization, citing a study by Ernst & Young which was paid for by the Edison Electric Institute and the American Gas Association, claims that 27 million Americans benefit from the lower tax rates and that 65% of the people who benefit have an annual income of less than $100,000. These claims are technically true but are very misleading. The study focuses solely on the number of returns by income bracket which report qualified dividend income and not the dollar amount of the qualified dividends by income bracket. As such, the study considers the person with a 2007 taxable income of less than $5,000 with an average qualified dividend income of $42.37 the same as the people with a reported income of more than $10 million who in 2007 had an average annual qualified dividend income of $1.5 million. No points for guessing who benefits more from the reduced tax rate.

Using the same 2007 IRS data used by Ernst & Young, I find the following;

- 80.9% of all qualified dividend income was reported by people with annual incomes of $100,000 or more.
- 65.1% of all qualified dividend income was reported by people with annual incomes of $200,000 or more.
- The preferred tax rate on qualified dividends reduced IRS tax receipts in 2007 by about $23.6 billion.
- Approximately 86% of the $23.6 billion in tax savings went to people with income above $100,000 and 76% to people with incomes above $200,000 and 46% to people with income above $1 million.

Just like the snake oil salesmen of the 19th century, they are claiming that reduced tax rates for qualified dividends are good for everyone when in fact most people will not benefit and end up paying higher taxes someplace else to make up for the revenue lost due to the lower tax rate on qualified dividends.