I’ve been thinking about writing this Crankytorial for a few days now, first thinking I should, then thinking, no, it’s too obvious. But in the end I think I need to get it out.
What the fuck do President Bush, Dick Cheney, Karl Rove, or whoever think they’re doing with this so-called economic stimulus plan? The economy is still in the dumper and I am far from the only person who’s been looking for work for more than a year now. And what does the Ruling Trio propose as the centerpiece of a plan to start making things right? $300 billion in tax cuts for the ‘investment class’!
Zimran ‘Winterspeak’ Ahmed wrote in his weblog that he can’t understand why anyone would be opposed to this particular change, using as his launch point what I thought I was a very insightful column by economist Paul Krugman. Krugman focused on the politics while Ahmed, a student in the Graduate School of Business at the University of Chicago who regularly publishes such economic commentary, takes a more purist economics approach: double taxation of dividends is bad because it distorts corporate behavior by causing executives to choose stock buybacks as a way to return profits to investors. So I had a little exchange with him via email, with my main point being that eliminating taxes on dividends entirely does not remove this distortion, it only changes the bias from favoring buybacks to dividends; unfortunately our discussion got caught up in politics.
I wasn’t the only correspondent Ahmed had, so he followed that original post up with another today. In this post, he seems to agree with my point regarding equalization of taxes on capital gains and dividends but doesn’t go so far as to state that the Bush proposal should be defeated. However, he continues to ignore the political dimension (which is what I meant by ‘purist approach’) and that means he doesn’t go far enough to judge if this is a good way to deprive the federal government of so much money; Ahmed does agree it will not stimulate the economy.
Scott Herhold, writing in yesterday’s Mercury News, looked at Who gains from no tax on dividends?. He pointed out that if the change is implemented, executives like Oracle CEO Larry Ellison will be able to take home millions (in his case, perhaps hundreds of millions) of dollars per year tax free. And still retain the 1.4 billion shares of Oracle he owns. Let’s see, I own 400 shares of Microsoft and (from the option package I got from NetDynamics) about 4800 shares of Sun. If each company were to pay the 20 cents/share/year that Herhold mentions, I would start raking in a huge $1,040 a year tax free. Add to that the big $300/year I already get in dividends from 200 shares of Verizon. Ooh baby, that sure makes up for no job! That’s sure to stimulate some spending on my part in, oh, two years when the difference in my taxes shows up in my pocket. Herhold also includes a suggestion from some shmoe he interviewed that actually makes a lot more sense to me if we want to eliminate double taxation of dividends: “allow the corporation to deduct what it pays in dividends on its corporate tax return — thus treating all stock the same.” To be honest, I’m a little surprised Ahmed didn’t include this option in his considerations.
So where do we find some help for the economy in the near term, and not just a political payoff riding the back of this urgent need? Unemployment is harsh, states are running around trying to figure out how to control deficits that are simply unreal (California, for example, is facing a $35 billion shortfall, which is about one third of it’s budget), and the Administration seems to be gearing up to drop an additional $50-200 billion on war with Iraq. Bob Herbert chimes in with a very relevant column in today’s NY Times: Jobless, and Stunned. I love his opening line, shows why he writes for the Times and I write for this website: “Left behind by the great Republican raid on the national Treasury are folks like Karelia Escobar and Joe Bergmann, middle-aged New Yorkers who have worked most of their lives but now find themselves traveling the anxious paths of the long-term unemployed.”
The Bush team is starting to put out some spin on this proposal today, in any case. The elimination of dividends isn’t so simple or pervasive as critics are making it out to be. Dividends will only be tax free to the extent that the corporation paying it was profitable in the year; if Company X makes a $100 million profit and pays $35 million (the top rate) in taxes, then it can pay up to $65 million in dividends but anything over that will be taxable to shareholders. If a company files a tax return claiming it lost money for the year (not including taxes paid to foreign gvernments), any dividends it pays are taxable since this would not be a situation where double taxation comes into play.
Further, if the company decides to retain some of the earnings to invest in itself, the unpaid amount can be declared as ‘deemed dividends’ and shareholders can add the amount to their cost basis, reducing the capital gains when the stock is finally sold. So shareholders in companies that have a loss (in a given year) but still pay dividends will still be taxed on those payouts at ordinary income levels. Preferred stocks have become very complex in recent years and the treatment of their dividends is even more twisted.
The AP reported that Bush made a staged appearance today at a flag company to defend his plan (more spin. The President claimed that attacks on his plan were class warfare, which is a nice soundbite but not very meaty; he never actually denied that most of the direct benefits to individuals will go to the very well off. In fact, his comments seem to suggest that giving the money to these people will cause them to expand their business (adding jobs) and increase personal spending (adding jobs). I think we saw this kind of thing before, 23 years ago. Ronald Reagan rode his Supply Side Economics to the White House but our current president’s own father called this what it is, Voodoo Economics (before swallowing his pride to become VP).
Didn’t work then, doubt it will work now. I don’t see how this proposal helps the economy in a significant way. Thanks GWB.
BillSaysThis 