Dividend Tax Cut

In all of human history it would be difficult to find an example of a country that cut taxes as it prepared to go to war. But this is exactly what President Bush now proposes to do. In a worst-case scenario, the U.S. military may find itself under fire in three countries: Iraq, Korea and Afghanistan. To have called for tax cuts during the Second World War would have been an insult to American patriotism as well as fiscally irresponsible. The idea of cutting taxes while American servicemen were dying on the battlefield would have been rejected out of hand. On the other hand, Lyndon Johnson tried to hide the cost of the Vietnam War and began an inflationary spiral that continued for decades. Eventually he had to raise taxes.



Most experts believe that the war on terrorism (even without an attack on Iraq and/or Korea) will be very expensive and may last for a decade or more. Wise fiscal planning is required for such an endeavor, and the burden must be fairly distributed. Those who support this war are honor bound to pay for it. Proposing tax cuts implies that the war on terrorism is not serious.

The president’s tax cuts also fail to pass muster on equity grounds. According to a Jan. 13 article in Tax Notes, the authoritative tax weekly, the average tax cut for those with adjusted gross incomes of $1 million a year or more will be $88,873. The cut for those with incomes of $500,000 to $1 million a year will be $17,605. Meanwhile, those with incomes under $20,000 will receive only $63. The Bush tax proposal makes the tax system less progressive as the tax burden is shifted from the rich to the lower-middle class—a trend that started under President Ronald Reagan and has continued ever since. It is contrary to Catholic social teaching, which recalls the story of the Last Judgment (Matthew 25) and instructs us to put the needs of the poor and vulnerable first.

The states that piggyback on the federal tax system will also be losers under the Bush tax plan. If the feds cut taxes on dividends, these states will automatically see a decline in state revenues. States are already in desperate straits, because the recession is causing a fall in tax revenues. This fiscal crisis is partly their own fault, since many states spent, borrowed and cut taxes during good times without putting anything away for a rainy day. Few state politicians get re-elected because they paid off debts or put money in the bank.

In addition, all the accountants who lost their jobs because of Enronesque accounting scandals will find full employment under the dividend tax cut. What few people realize is that the Bush proposal does not eliminate the tax on dividends unless taxes have already been paid at the corporate level. The complexity of the proposal is mind-boggling. Individuals and corporations will have to track what part of their dividends is taxable and what is not. Individual taxpayers will face more complex tax forms, while corporations will have to hire an army of accountants to implement the plan. “Creative” accounting will be encouraged to push the limits of the law so that the minimum of dividends is taxable.

The president’s proposal also fails as a stimulus package. The best way to stimulate the economy is to put money into the hands of people immediately with something like a tax rebate. Yet it is likely that the stimulus of the Bush cuts will come just as the economy heats up because of economic recovery and war spending.

Ironically, although the Bush dividend tax cut is supposed to raise stock prices, it might in fact further depress the stock market if it encourages corporations to pay out dividends instead of retaining earnings. Retained earnings generally result in expanded investment and higher stock prices. The tax system currently favors capital gains (stock price growth) over dividend income. President Bush would reverse this bias. Companies with large cash reserves could be forced by stockholders to pay out dividends, which would eventually result in lower stock prices or at least slower growth. On the other hand, a complicated provision in the Bush plan would allow companies to deem dividends without actually paying them. This would allow corporations to retain earnings and would reduce capital gains taxes for individual taxpayers. Bring on the accountants!

Nor would the dividend tax cut help battered companies, like United Airlines, that are on the financial ropes. They have no profits and therefore no dividends. The dividend tax cut will help the richest and most successful companies the most, although it will admittedly not help banks, oil companies and other corporations that pay little in taxes today because of already existing tax loopholes.

The Bush dividend tax cut makes no sense on fiscal, stimulus, economic or equity grounds. Taxes should be made simpler and fairer, not the opposite.

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