Posted on 01/07/2003 6:56:20 AM PST by SJackson
President Bush has surprised nearly everyone with his decision to propose a big-bang economic growth package that includes a 100% tax exemption on dividends received by individuals. Eliminating the double taxation of corporate dividends will raise stock market values, increase investor returns, and improve both corporate governance and corporate finance practices, in effect becoming the most significant pro-growth tax reform since President Ronald Reagan slashed personal income-tax rates twenty years ago.
This policy change will lower the effective tax rate on dividends paid from corporate profits to 35% from roughly 70%. Taxpayers receiving dividends will now keep 65 cents of each new dollar of corporate profits rather than the 30 cents they now retain under current tax law.
Since individuals and businesses spend and invest their money more wisely than government, this tax reform will make the economy more efficient and better able to grow to its potential. The move will also free up more investment resources for shareholders and corporations, thus making more funds available for entrepreneurship, business expansion, and job creation in the years ahead.
Investors, of course, will now demand greater dividend payouts from companies — a good thing. Cash dividends will be tax-free, while interest payments from corporate bonds will be taxed at the top personal rate (which could drop to 35% under the president’s new proposal). Shareholders will keep 100 cents on each new dividend dollar, compared with only 65 cents on each dollar of interest paid from corporate bonds. That will force corporations to reduce their issuance of new debt and rely more heavily on dividend-paying stock finance.
This tax-induced shift in shareholder demand from interest-bearing bonds to dividend-paying stocks will have wide-ranging benefits. It will stop firms from over-borrowing and debt leveraging up to their eyeballs — a practice that has worsened economic downturns and hastened business bankruptcies. And as the system of corporate funding better balances equity and debt, the business sector will grow healthier and the economy stronger.
Also, a new model of corporate governance will take hold. Just as taxpayers wish to keep more of what they earn from the government, tax-free dividend payments will encourage shareholders to demand more of what corporations earn. This will force companies to reduce their excess cash-on-hand and pay more money out to their shareholders.
In recent years too many CEOs have used corporate cash for ill-conceived acquisitions that all too often put empire-building over higher shareholder returns. Now boards of directors will pressure management to turn the cash over to investors. This change in corporate behavior will streamline operations and avoid the failed over-conglomeratization that sank stock market prices in the 1990s, especially in the telecom, media, and energy businesses.
Many firms, especially technology companies, will now be forced to start paying out their unnecessarily high cash balances to shareholders. Outfits like Microsoft, Cisco, and Dell will undoubtedly go down this road.
Additionally, investors will more often judge corporate creditworthiness on the basis of dividend yields (dividends divided by stock prices) instead of conflicted research reports. In fact, greater dividend payouts and yields will become the key benchmarks in judging the worth of stock investments.
All this should be a much-needed tonic for the major stock-market indexes. Since the current economic slump began in 2000, the stock-market decline has been the economy’s central problem. Shrinking market capitalizations have damaged corporate creditworthiness and frozen business operations. In all too many cases huge stock-market losses induced CFOs to play fast and loose with accounting ethics. Investor confidence evaporated as Worldcom, Enron, Tyco, Adelphia, and a list of others grabbed the headlines. So, last year was the first since 1912 that an early economic recovery was accompanied by a plunging stock market.
President Bush’s bold decision to eliminate the double taxation of corporate dividends will help restore investor confidence and the vitality of American businesses. Since business creates jobs, a healthier corporate sector is crucial to a full flushing-out of the nascent expansion.
The Bush administration's new growth package will also include a speed up of income-tax cuts for all brackets, a substantial cash-expensing bonus for small business equipment write-offs, and a quicker implementation of child tax credits and marriage-penalty deductions. Democrats, of course, are dusting off their class warfare arguments, criticizing the Bush plan as another tax cut for the rich. But this is a content-less position that has failed miserably in recent elections.
The president has correctly understood his mid-term election mandate to grow the economy and win the war against terrorism. On the war front, he has proven his mettle since Sept. 11. And on the economy, he is clearly willing to invest his new political capital in pro-growth tax measures, as well as pro-market reforms for health care and prescription drugs. The nation will benefit enormously as he moves swiftly on all of these fronts.
— Mr. Kudlow is CEO of Kudlow & Co.
Yep, and it sucks then as well. So for the wealthy, that represents TRIPLE taxation.
Why shouldn't rich people have to pay a little more, rather than hiring accountants to show them how to pay less then the rest of us, by percentage?
That is EXACTLY what the Dems want you to believe - that someone, somewhere, is getting off easy. The truth is, just about everyone gets hosed, and any tax relief program should be broad-based - eliminate the dividend tax, and take two points off FICA to help lower-income workers (someone making $30,000 a year would keep an additional $600).
The liberals and labor hate "leveraged buy-outs," Michael Milken's creative "junk bond" financing, debt/bond financing for corportations, but LOVE it for government financing... This totally tax free dividends would not only help the "aged" they profess so much love for, but would make EQUITY FINANCING popular again!
Oh... I forgot! The "aged" would escape the plantation for the liberal Demonicrat "minorities!" How stupid of me!!!
Sure. "double taxation" is just a buzzword to sell the plan. The benefits will probably be more in the area of corporate governance that economic stimulus, at least in the short term. IMO, GWB should have simply accelerated the cuts and used his political leverage to scrap the whole system, probably post 2004.
You sound like you're from Democrat B.S. central. Plenty of people pay substantial taxes on dividends who aren't multimillionaires. If you get $10,000 in dividends, not an unrealistic amount for a middle class retiree, and you're in the 28% tax bracket, that's $2,800 a year in taxes.
Challenge accepted.
Joe is a "poor" person, he works a telemarketing job 20 hours a week for $8 an hour. He rents a rat hole for $320 a week and has no savings. He grosses $8320 a year, which means he is refunded for all of his federal and State taxes. Joe is one of the truly poor who is too proud to go on welfare, so he lives on crackers, hot dogs, and milk and looks for a better job.
Bill is a manager at a hospital and makes $90,000 a year. He is doing pretty well and has a decent investment portfolio. His dividends this year come in at $6,000. He pays 28% tax on that dividend, or $1680 in taxes. With the removal of his tax on dividend, Bill get's to keep $1680 he normally wouldn't. Now what does Bill do with that money?
A. He turns it into 16,800 dimes and takes a bath in them ala Scrooge McDuck
B. He takes the money home in cash and hides it under his bed
C. He invests it back into the market
I'm going to go out on a limb and say that Bill chooses option "C".
Within a few months, several franchises pop up in Joe's area and Joe get's a job at the new Craft World working 40 hours a week at $9.25 an hour. Joe now grosses $19,240 a year and has moved into a nicer $450 a month place and, while still having to watch the bills, living much nicer than before.
How did that happen? How did Joe's life get better? Because people like Bill had more money to invest to open new businesses. And now the new money that Joe is getting goes to Wal-Mart for new clothes and shoes and to the supermarket for nutritional food. Now those stores can afford to hire more people like Joe and improve their lives as well. All because "rich" people tend to invest their money rather than horde it. That is the fallacy of the "it only helps the rich" battle cry.
A lowering of marginal brackets would have been a far better stimulus, though, IMO, this is a throw away proposal, red meat designed to take the dems focus off the tax cut acceleration. I suspect it will be abandoned, perhaps in favor of a fixed dividend exclusion as we've had in the past.
What could be done now for Joe? A lowering of marginal rates means nothing to those who don't even break into the category of "tax payer". At least nothing more than an elimination of the dividend tax would. Plus, the elimination of the dividend rate is not the only part of President Bush's tax reform plan.
This is from the CNN website in a link on their front page:
President Bush unveiled a $670 billion economic stimulus package to help boost the ailing U.S. economy. The package includes proposals to eliminate taxes on stock dividends, reduce income tax rates over 10 years, offer tax breaks to businesses and individuals, provide for an increase in the child tax credit, decrease the so-called marriage penalty tax, direct more federal aid to needy states and extend unemployment benefits.
Also included are:
Plan: Accelerate income tax rate cuts
Issue: President Bush would like to speed up the pace on the scheduled income tax rate cuts in the Tax Relief Act of 2001. Currently, taxpayers are scheduled for a rate cut in 2004 and again in 2006, but the president would like to make some of those cuts effective in 2003.
How it may affect you: Upon passage, the president would order an immediate adjustment to the amount of money withheld for income taxes, so taxpayers would keep more of their pay checks right away, according to the Treasury Department.
Now that would immediately affect Joe by letting him take home more money rather than wait until April for a refund.
I know it's very sad for many people to think that rich people are going to have more money to invest and make even more money, but it's that investment capital that produces jobs.
Poor people don't hire other poor people, rich people hire poor people. If you want more poor people to have jobs, give incentives for rich people to hire them. The best incentive is to allow the rich people to keep more of their money that they gain from employing poor people.
It's sad, I know, that rich people aren't stoned to death and and a worker's paradise like Russia experienced from 1917 to 1989 isn't established, but Capitalism works on a very simple principle: if profit is to be made from spreading the wealth around in a particular manner, then those who want to be profitable will spread their wealth in such a manner.
First, you can’t do anything for Joe via tax policy because he doesn’t pay taxes. What trickle down there is will be beyond the next election, and will have no short term stimulative effect. The "trickle down" impact on Joe individually will be minimal. He needs to educate himself to get a better job.
I’ll repeat myself. A further reduction in marginal rates would be a far better stimulus. And, IMO, “tax free” dividends are probably a throw away item which will be negotiated away.
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