FC: Russell Roberts: Killing dividend tax will help all of us

[Declan McCullagh <declan () well com>]

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Date: Thu, 16 Jan 2003 09:49:26 -0600
From: Russell Roberts <roberts () wc wustl edu>
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




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