US economy, the economic engine of the world, was severely hit by the burst of the interest bubble. Thereafter it went into a mild recession and today the economy is delicately positioned. In order to boost the economy, President Bush had announced a rather ambitious and far-reaching Jobs and Growth Plan in January. The plan proposed a $726 bn tax cut spread over the next 10 years. The Congress passed a much-scaled down version of the plan in May with tax cuts totaling to $350 bn. Some of the important features of the plan include eliminating marriage penalty, increasing child credit for families, reducing the maximum income tax slab from 38 to 35%. But the center of attraction was the tax cut on dividend income. The final version of the plan reduces the tax rate for dividends in the hands of individuals to 15%. It also reduces the tax on capital gains from 20 to 15%.

In the original plan, President Bush had announced that dividend tax would be eliminated for individuals. Many welcomed this since it would end the unfair double taxation of dividends. Dividends are taxed twice, once as profits in the hands of companies and as income when it comes to the shareholders. Many argue that because of this tax treatment companies have switched to other mechanisms such as buy-backs to return cash to their shareholders. Some feel that dividend tax has made capital gains more attractive from investors' point of view. And this in turn has encouraged many corporate managers to focus on the share price rise. Such an attitude could have encouraged the accounting tricks that companies adopted during the late 1990s to project good earnings. Some also argue that since interest is tax deductible and dividends are not, managers would have been inclined to raise debt than raise equity capital. These allegations had led a strong impetus to the demand for elimination of dividend tax.

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