m 401K has three pages of tracking monies coming in, and I only worked for two companies. The idea that every penny someone makes should be taxed must go.

However, the theoretical reasoning behind the tax is to equalize the treatment between capital gains and dividends, and thus weaken the incentive to debt financing, as well as discouraging companies from holding onto wads of cash which they then find stupid projects for. Economists love this tax break, because the problem of executives looking for stupid empire building projects on which to spend excess cash is one of the favorite economic problems of the last 20 years.

There is no conceivable tax break that will benefit the poor more than the rich, because the poor don’t pay taxes. The only thing you could do, if you wanted to help the poor, would be to integrate FICA into the tax code — but I’m not sure the country could handle everyone over the age of 65 having a heart attack simultaneously, as they would if we dared suggest that FICA is not an insurance program, but a Ponzi scheme.

Brian, it is both theoretically consistent, and empirically validated, that the current disparity between capital gains taxation and dividend taxation is largely responsible for the decline in average dividend yield from 7% to 2% over the last 25 years. When capital gains are tax favored, companies that pay dividends rather than accumulating capital or initiating stock repurchase programs have trouble raising equity capital (think utilities), or see their stock price punished by investors who hold their stock outside of tax-free accounts. This effect is especially pronounced in technology companies, where you see firms like Microsoft (40 billion in cash on the books) choosing never to pay dividends because the owners control a substantial portion of the company (Bill Gates has 12.5% of MSFT), and pay taxes at the top rate. They want to take their income as 20% CapGains, not 40% ordinary income. If dividends received equal tax treatment, the big tech companies would long since have started paying dividends.

First, with respect to the person above who derided the idea that corporate behavior would change if individual shareholders didn’t pay tax on dividends. Yes, sir, that’s true. Companies that don’t pay dividends may have more difficulty raising needed capital, with people possibly now seeking investments that have a consistent cash yield. And don’t forget small businesses. The vast majority of corporations in this country are privately and closely held, and currently have to be operated in arcane ways so as to avoid the dreaded “dividend” monster that the IRS loves to raise on audits. The proposal would make this problem go away and will allow business owners to operate efficiently based on business needs, not the stupid concept of double taxation. Double taxation is an enormous drag on the economy.

Second…I have a rather major quibble with Radley’s suggestion that the portion of a person’s IRA or 401(k) distribution made up of dividends would be tax free. Unfortunately, this is probably not going to be true. Pam Olsen, Treasury Assistant Secretary of Tax Policy announced on January 8th that it would be the government’s position that distributions from tax free accounts such as 401(k)’s and IRA’s will CONTINUE TO BE SUBJECT TO FULL TAXATION (presumably because taxpayers are already afforded a deduction of sorts when they put their own $$ in the plan). Bummer.

Which brings me to my final point. I have a feeling Bush’s plan doesn’t go far enough because of this retirement plan problem…after all, a substantial portion of the U.S. population’s stock holdings are in retirement accounts, thus negating much of the benefit of tax free dividends. Also, I understand the reason behind the addition of retained earnings to shareholder basis (it’s designed to mitigate any bias toward dividends — otherwise the IRS would be like a deer in the headlights, because for 90 years the Internal Revenue Code has been carefully rigged against taxpayers to treat many types of transactions as dividends — without this basis addition the entire tax code would be turned on its head. Wouldn’t that be funny?) Heck, anything to reduce taxes on gains for a selling shareholder gets my vote. BUT SOME OF YOU CANNOT IMAGINE THE COMPLIANCE BURDEN THIS BASIS ADJUSTMENT FEATURE PLACES ON CORPORATIONS LARGE AND SMALL. Yet more friction on the wheels of business.

What should have been proposed is that corporations should be permitted a deduction for dividends paid. After all, remember, only PEOPLE pay taxes.

Also, right on twb! Arguing that the middle class is only interested in spending everything is just as bad as saying we need social security to protect the lower income people because they are too stupid to save for the future…

This is where difficult and time consuming researche like, actually reading the proposal, or picking up a copy of the WSJ helps. Companies that don’t pay dividends but have retained earnings will be allowed to give shareholders a break on cap. gains taxes by increasing the basis of shares held by the amount of the companies taxed profits. From the wsj:
“Say a share is bought for $100 and the company has $6.50 a share in fully taxed profits that year. The company will notify the shareholder of this. Then, suppose the share is sold for $110, for a $10 profit. The capital-gains tax will apply only to $3.50 of the gains ($10 minus $6.50.) Each year, a holder will be able to increase his “basis” — the cost for figuring out his gain on shares held, for tax purposes — by the amount of the company’s taxed profits.”

T

Oh, and doesn’t eliminating the dividend tax privilege solid established companys over start-ups who can only generate reward via a ramp up in stock price? Oh, wait, the GOP will fix that in the next round by cutting taxes some more, again in such a way that primarily benefits upper middle class and upper class Americans. Which is n’t class warfare. Only complaining about it is class warfare.

Maybe in a perfect world we’d be able to get rid of instances of double taxation. Probably a reasonable goal. But in our current imperfect world, Bush is selling this idea as part of his plan to stimulate the economy and pull us clear of the danger of a double dip recession. If that’s the goal, then aren’t there other tax policy changes that would be more likely to achieve this? If you want to stimulate the economy, wouldn’t it be better to give the extra cash to the groups that are most likely to spend it all, and get things moving again? Wouldn’t it be better to give the cash to the middle class who’d spend it on computers, TVs, cars, and so on? Businesses aren’t investing that much now even though capital is really cheap, interest rates are very low. Why? They need customers.