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May 18, 2003
Taxes...snore!
Virginia Postrel can't decide whether or not the Senate version of 'dividend tax relief' is the dumbest tax "reform" ever.
With the states in $50 billion of deficit this year, I don't think any tax cut is a good idea right now. However, the House version remedied a bias in the tax code. Taxing dividends at a maximum rate of 40% and capital gains at 20% (or less) gave undue favor to growing companies that retain their earnings instead of sharing them with their shareholders. Sounded like a great idea in 1999, but I bet a lot of tech stockholders wished they had gotten a piece of the earnings pie back then (if it existed) instead of nothing now.
The House version of the tax cut simply decided to tax dividends and capital gains at the same maximum rate: 15%. This basically means take your pick, Cisco (which pays no dividend and retains its earnings) or Southern Company (which retains little of its earnings, paying most out in dividends) or the myriad number of companies that fall somewhere in-between. The Senate version (temporarily) eliminates the tax on dividends, therefor reversing the previous bias that existed in the tax code instead of eliminating it all together.
A principled executive branch should recognize a better idea (the House version) and run with it. But Bush insists on getting the closest thing to his version of legislation passed in this instance. What's the point? Unless this is all part of some greater scheme to foister even more contempt for a tax code that is becomingly increasingly political, why not run throw some meat to the few people in the House with a brain who came up with a tax cut/reform that actually makes some sense.
I guess it's just another example of how anyone with a brain in the White House inevitably trades it in for a massive ego instead.
UPDATE:
Bruce Bartlett writing in National Review has a good column on the White House's misguided economic team, though he doesn't really go into the specifics of why the House tax plan is preferable until the last paragraph.
UPDATE REDUX:
Warren Buffet makes a similar point in the Washington Post. Under the new dividend tax cut, his average tax rate could drop to 3%! And, he points out, he probably won't be creating any new jobs. Oppose a tax cut? Class warfare. Enact a tax cut? Class welfare (for the rich!).
Posted by Chris at May 18, 2003 05:15 AM
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