Tax reform: taxing bulls, taming bears

It is a much-noted irony in American society that many of those whose work we value the most (e.g., teachers, nurses, moms) are paid much less than those whose services are (in the great scheme of things) not nearly as important. Greta Van Susteren is worth $900,000 a year? Levar Arrington deserves $10,000,000 just for signing a contract? Time Warner chairman Steve Case deserves $72,000,000 for running his company into the ground?

As even the most committed of laissez-faire economists will admit, the capitalist system often produces a distribution of wealth that has very little to do with merit. Theodore Judah, the real genius behind the transcontinental railroad, got next to nothing, while men like Leland Stanford successfully stole, not only millions, but all the credit.

But unfair distribution of wealth is endemic to all economic systems, and capitalism has this great advantage: it produces a far bigger pie than any other system. Much better to have less than your share of a huge pie than to have perfectly equitable distribution of no pie at all!

Further, most attempts to correct "unfair" distribution of wealth create more problems than they solve. Clinton's 1993 law creating tax disincentives for corporations paying executives salaries in excess of $1,000,000 induced companies to place more emphasis on stock options in their executive compensation packages. This change meant that top executives had a strong incentive to manipulate company stock prices upward by whatever means possible. As a result, we got some of the most absurdly inflated compensation totals the world has ever seen-and a completely predictable rise in executive-level fraud.

Yet there is one way to try to correct our society's sometimes irrational distribution of wealth without running much risk of making things worse: fixing and simplifying the tax code.

The fact that a company can come to Aberdeen, play some paper games with water-system ownership, give us $3 million dollars, and then walk away with a profit shows just how bad our current system is. Eliminating the tax loopholes that make such manipulations possible is certainly a step in the right direction. An even better step would be to eliminate permanently the double taxing of corporate profits and to stop favoring capital gains over earned income.

The federal government currently taxes corporate income at a 35 percent rate - rather high compared to other industrialized nations to begin with. Until early this year, whenever a company paid out its earnings as dividends, another tax kicked in. Shareholders had to pay up to 35 percent in income tax on any dividends received. This meant that, out of every dollar of corporate profits, the shareholders would keep only 44 cents.

But a company could limit tax liability by using its revenue to buy out another company or to expand in some other way. In this way they avoided corporate taxes. Shareholders got their compensation in the form of increased stock prices instead of dividends: nice, since taxes on capital gains were 20 percent or less.

Unsurprisingly, growth stocks vastly outnumbered those that paid out their earnings as dividends. But this was very bad news. A stock market focused primarily on capital gains is little more than a giant ponzi scheme: a bubble just waiting to burst.

Early this year, Congress finally acted to eliminate the double taxation of corporate profits: no more tax on dividends! Unfortunately, Congress eliminated double taxation only for three years: too short a time to bring about permanent changes in corporate behavior. What we really need is the permanent elimination of taxes on dividends and a move to treat capital gains like ordinary income.

More tax cuts for the rich? Not at all: tax cuts that will help rationalize the stock market and leave fewer opportunities for unscrupulous manipulators to rake in the big bucks.

>>It is a much-noted irony in American society that many of those who se work we value the most (e.g., teachers, nurses, moms)<<

MOMS???
Sorry, there is not enough money to balance the rewards I get from my girls.

What we really need is the permanent elimination of taxes on dividends and a move to treat capital gains like ordinary income.

Elimination of taxes on both dividends AND capital earnings (gains).

Capital gains come from long term holdings as such much of the gain can be inflation. To tax the full gain at ordinary rates would tax inflation so that the net could be worth less in historical dollars than the amount you started with. Further, the jobs you described are generally with the exception of nursing jobs, ones that do not require a real thinking based skill.

If individuals and businesses in America paid the cost of U.S. government when they made retail purchases of goods and services, wouldn't all of a $72 million annual salary come out of dividend payments to shareholders?

Capital gains come from long term holdings as such much of the gain can be inflation.

True enough. The problem is that, once one starts making distinctions of this type in the tax code, even for what seem like very good reasons, there's no place to stop. We get a mortgage interest deduction, medical expense deductions, renewable fuels deductions, and then the thousands of special provisions that make taxes such a nightmare and leave so much room for manipulators.

Besides, capital gains income is often not very long term--Hilary's cattle futures, for example. Why should she get privileged tax treatment for income "earned" through this kind of speculation? Treating capital gains differently than regular income just creates way too big a tax loophole. *Maybe* this would go away if only truly long term capital gains were privileged, but I suspect not.

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