February 11, 2003

  

Alan Greenspan is testifying this morning; according to WP he's going to support the dividend tax cut. It's not clear whether Greenspan's support would change the minds of the many dissenting Republicans, but surely it will bring some of them on board.

On its own merits, a dividend tax cut doesn't seem like such a bad idea. Stocks that pay dividends are actually quite rare - even if a company is profitable, it's unlikely to pay dividends on its stock. This means that to make money, investors have to speculate on which stocks will increase in value, rather than which stocks will be profitable. We've seen this disconnect cause all kinds of mayhem in the past year, in cases where companies aren't profitable (in fact, they're fundamentally unsound) but their stock value has gone through the roof for some reason. Eliminating the dividend tax would encourage investors to purchase stocks that pay dividends and therefore create an incentive for companies to pay dividends rather than look to inflate their stock price.

There are two problems with this. First, the Bush people are trying to sell the dividend tax as an economic stimulus. But how would it foster additional investment? It's not as if people are spending moeny they would otherwise invest because of the dividend tax. People may start investing in stocks that pay dividends, but won't that just draw investment away from stocks that don't pay dividends? While this might be a worthy goal in and of itself, it's hard to see how this will stimulate the economy. The other big problem, of course, is it's expensive! They're projecting the dividend tax cut will cost $385B over the next 10 years, when we're running a deficit of about $300B.

UPDATE: Take a look at the Economic Policy Institute's statement against bush's proposed budget. There isn't much analysis there (I guess because they wanted it to fit neatly on a page), but they do break the dividend tax cut issue into two parts:

The permanent dividend tax cut, in particular, is not credible as a short term economic stimulus. As tax reform, the dividend tax cut is misdirected in that it targets individuals rather than corporations, is overly complex, and could be, but is not, part of a revenue-neutral tax reform effort.
As I understand it, corporate profits are taxed at the level of the corporation, and dividends are taxed separately (hence all the hype about "double taxation"). Shifting all of that tax to the corporation (a revenue-neutral policy) would increase the corporation's tax burden, with this burden ultimately passed on to shareholders either in the form of smaller dividends or a lower stock price. So individual investors would be in the same boat they're in now, except that the incentives for stocks to inflate their stock prices rather than pay dividends would be gone.

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