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Wednesday, January 08, 2003

Last Thoughts On The Bush Tax Proposal - Until Next Time

First, what does Bush really want? According to news stories, in December Bush aides were contemplating a $300 billion package with a 50% dividend exemption. Now we are offered a tax cut package exceeding $600 billion with full dividend exemption. Will Bush supporters die of disappointment if Bush allows himself to be bargained back to the 50% threshold? [Mini-update: the WaPo chimes in.]

Secondly, Bush has changed the tone in Washington! Democrats are not talking about undoing the tax cuts scheduled to be phased in in 2004 and 2006. Now, they are proposing their own version of tax cuts. A political win for Bush.

Thirdly, we eagerly await the many opportunities for new tax management schemes at both the corporate and personal level that the full dividend exemption will afford. I guessed at some corporate ideas at the end of this post. An obvious play for individuals - borrow money to buy tax exempt preferred stock. Deduct the interest expense, take the dividend tax-free, and maybe make some money. Whether this works will depend on the subtle interplay of the tax rates of marginal investors and issuers. Some investors are tax exempt; some issuers don't pay tax. Time will tell whether this tax play works, and whether Congress allows it. Rules are already in place to prevent such scheming with tax exempt bonds - more tax code wrinkles to address dividends?

Finally, we bemoan the lost opportunity of tax simplification. Back when Steve Forbes was boring us with calls for a simple flat tax, the argument was that, since simplification led to winners and losers, it could only be coupled with a tax cut. Well, with his 2001 and 2003 tax proposals Bush has offered $2 trillion in tax cuts without a lot of simplification. Bother.

UPDATE: Jane G. and Mindles on modifications to the dividend accounting. More complexity.

UPDATE 2: Floyd Norris of the NY Times explains the subtleties to us. And some of my earlier questions are answered: if a corporation does not pay taxes, its dividends will not be exempt. Hmm, does this mean that ordinary shareholders will put the company's tax reurn under a microscope? They may not like what they see. And I am thinking of "Big Pharma" when I say that.

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