--- Date: Thu, 16 Jan 2003 09:49:26 -0600 From: Russell Roberts <robertsat_private> Subject: Commentary on Eliminating the Tax on Dividends Here's a commentary I did this morning on NPR's Morning Edition on the Bush economic plan. I wanted to get attack the class warfare issue of eliminating the tax on dividend income and explain the basic economics of why double taxation is bad for the economy. After the commentary, you'll find a link to a story about the Carter Administration's tax plans. I ignored an issue that may be of interest to some of you but was tough to deal with in 400 words. The plan eliminates the tax on dividend income. This increases the incentive to offer dividends instead of retaining earnings compared to current tax law. But the plan also has a provision to reduce the taxation of capital gains. Firms that retain earnings will also get a tax break for their investors. But the relative impact of both provisions is still to encourage the paying out of dividends compared to current law. The idea, which is quite elegant, is to neutralize the role of taxes for the firms decisions about debt, equity and retaining earnings. Cut Taxes, Help the Rich. (And the rest of us too) by Russell Roberts National Public Radio's Morning Edition January 16, 2003 A lot of people seem to think that the Bush stimulus plan is just a way for the President to pay off some of his fat cat friends. Could be. But for those who always assume the worst about this President, I have two words: Jimmy Carter. Jimmy Carter also supported the centerpiece of the Bush plan, the elimination of the tax on dividend income. Wow. Who knew that Carter had a secret agenda for helping his fat cat friends? Or maybe there's another reason for cutting taxes on dividend income. Actually, for over fifty years, prominent economists have opposed taxing dividend income and the so-called double taxation of corporate earnings. The President's plan increases how much investors get to keep, after-tax, from investing in successful companies. That makes it easier for corporations to raise money for risky investments. That gives corporations more machinery and capital to work with, boosting productivity and wages. That's the idea, anyway. The President's plan also makes it more attractive for corporations to pay out the profits from successful investments to shareholders in the form of dividends. Those corporations already paying dividends will have an incentive to increase them. Increasing the use of dividends should reduce the kind of accounting shenanigans we've seen lately. It's one thing to have high profits on paper based on an arcane Caribbean partnership. But you can't pay a dividend out of a paper profit. You need to earn real cash. So dividends encourage credible accounting. That's one reason why the Carter administration dropped the idea of eliminating the tax on dividends. Big business wanted a murkier playing field, earnings kept inside the company for CEOs to play with rather than paying them out to shareholders. CEOs didn't want the pressure of having to make dividend payments. Sure they could choose not to offer dividends. But the companies knew that if dividends were tax-free to investors, there would be pressure from investors to offer dividends as a way of proving a company's reliability. Getting rid of the taxation of dividends will make some rich people richer. But it will also make the rest of us richer too. Not just those of us who happen to invest in dividend paying stocks. The real gain will an increase in investment that will raise our wages and our standard of living. Will it fix the sluggishness of today's economy? Probably not. For that, we're going to have to resolve the situation with Iraq. Russell Roberts is the John M. Olin Senior Fellow at the Weidenbaum Center at Washington University in St. Louis and the author of The Invisible Heart: An Economic Romance (MIT Press, 2001). To subscribe to (or unsubscribe from) Russ Roberts's mailing list, or to see other writing of his, please visit http://www.invisibleheart.com Here's an article from Forbes from 1988 that discusses the Carter Administration's flirtation with getting rid of the tax on dividends: http://www.forbes.com/forbes/1988/1128/192_print.html ------------------------------------------------------------------------- POLITECH -- Declan McCullagh's politics and technology mailing list You may redistribute this message freely if you include this notice. To subscribe to Politech: http://www.politechbot.com/info/subscribe.html This message is archived at http://www.politechbot.com/ Declan McCullagh's photographs are at http://www.mccullagh.org/ ------------------------------------------------------------------------- Like Politech? Make a donation here: http://www.politechbot.com/donate/ Recent CNET News.com articles: http://news.search.com/search?q=declan -------------------------------------------------------------------------
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