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Balanced Fare: We Report, You Deride

Wednesday, January 08, 2003



Who Luvs Ya, Baby?

Or, who loves the propsed Bush tax package? My thought was to scan the obvious candidates for cheerleading - the WSJ, the NRO, and the Weekly Standard. Away we go, with the Journal: We were hoping for a big and bold tax cut from President Bush and, by George, we got one.

They like it! Accelerating the scheduled cuts in the top rates is a winner! Well, I thought so too. The child care credit is marked as political: "while the credits are popular the economics isn't all that pretty." And the elimination of dividend taxation?

...Returning profits to shareholders, the true owners of firms, would free this capital to flow to higher-return, more productive companies. It would also bump up stock prices, maybe as much as 10%, thereby reducing the cost of capital and encouraging firms to invest. Count this proposal as another economic win.

Well, I will count this analysis as a near total loss. Half of the 10% jump in share prices is, almost literally, yesterday's news. New incentives, please! The WSJ ignores the many devices, such as share repurchases, by which companies have circumvented the taxation of dividends.

OK, on to Fred Barnes at the Weekly Standard, who makes an interesting political point: the Democratic tax cut is geared toward juicing the economy in 2003. If it then fades in 2004, well, hard luck for whoever is in the White House. Conversely, the Bush/Rove plan offers modest stimulus now, and more in 2004. This may be advantageous to Bush as he cranks up his re-election effort.

As to the specifics, what does Mr. Barnes say?

"...the president doesn't think injecting a huge amount of cash into the economy today would solve the real problem. Investment in buildings and equipment dropped 5 percent in the year following the terrorist attacks on September 11, 2001, and businesses cut 1.2 million jobs. That's the real problem: a lack of investment, not a lack of consumer spending."

OK.

" Were Bush only worrying about the politics of cutting taxes, he probably wouldn't have decided to eliminate the tax on stock dividends. Many economists question whether it would juice up the economy. And most of its benefits are bound to go to wealthy stockholders, thus prompting Democratic criticism. But it's bound to improve the stock market by making dividend-paying stocks more attractive and freeing money for investment. And guess when stockholders will actually get their tax cut? When they file their returns in 2004.

In truth, Bush has proposed the kind of tax cuts he likes, the cuts which provide incentives to save and invest."


Well, this is not exactly pounding the table for dividend tax relief, but I suppose Republicans can work with it. How about over at the NRO?

In a column apparently intended to elicit an "Oh, for pity's sake" response, Bruce Bartlett informs us that Jimmy Carter himself talked about eliminating the taxation of dividends. Well, it is not often that the NRO turns to "Jimmah" for economic guidance, so let's enjoy the moment.

David Malpass loves the proposals, especially the dividend part:

"Eliminating the double taxation of dividends would unlock equity capital, lower the cost of capital, and liquefy the U.S. capital structure, adding dramatically to U.S. growth. Right now, there's a tax wedge between corporate earnings and shareholders. This would eliminate that wedge, allowing a more efficient allocation of capital."

Boy, am I unconvinced.

And how about Larry Kudlow?

"Eliminating the double taxation of corporate dividends will raise stock market values, increase investor returns, and improve both corporate governance and corporate finance practices, in effect becoming the most significant pro-growth tax reform since President Ronald Reagan slashed personal income-tax rates twenty years ago."

He likes it too. I think raising stock prices and improving returns, if they are a one time adjustment to a new tax regime, mean nothing. Improved corporate governance? Well, companies may feels some pressure to actually cough up some cash, which may expose them to a bit of the same capital market discipline that so effectively reined in companies like Enron. And as to improved corporate finance practices? Presumably he means that companies will adjust their target equity to debt ratios and de-lever ther balance sheets. My prediction - look for creative schemes under which companies issue tax deductible debt to a special entity, which then issues tax exempt dividend paying preferred stock to investors. Schemes like this were popular in the 80's, exploiting accounting rules and the 85% exclusion companies enjoy on dividends received. My understanding is that tax and accounting rules have changed, but the imagineers on Wall Street will work with this.

More bold predictions: Congress will write a million new rules to cover "tax exempt" dividends. Can a company declare a dividend when it is not reporting taxable income, due, for example, to investment tax credits or depreciation? If a company is not a taxpayer, what "double taxation" are we avoiding? How about liquidating dividends - tax exempt, thus circumventing capital gains rules? I look for hideous tax "complification" as a result of this proposal. Which is just how tax accountants, lawyers, and Wall Street likes it. Oh, man, cynicism reigns.

So, big finish - the usual suspects support the Bush proposal, with more enthusiasm then I expected.

UPDATE: Get off the WSJ Editorial page, and the WSJ is a lot more balanced.




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