Friday, January 10, 2003
I haven't blogged about Bush's tax plan until now, for a few reasons. First, I laid out my general views about taxation at length here. If you don't want to read that very long post: I favor a consumed-income tax. All investment and charitable giving would be deductible from income; the residual income would be taxed according to a steeply progressive structure. I would repeal the corporate and estate taxes entirely and tax all income equally (dividends and capital gains, no longer taxed at the corporate level, would be taxed as ordinary income). I favor this system because it is simple; it leverages the existing tax-collection infrastructure; it is fair; it promote social solidarity; it redresses the American savings deficit; it will promote social mobility; it will encourage growth; and it will reduce transaction costs that are a pure drag on the economy. (And it will cure baldness, halitosis, and short-term memory loss.)
So what do I think about Bush's tax plan? Well, the acceleration of rate cuts is good. If it makes sense to cut rates in 2006, it makes more sense to cut them now. But I am much more ambivalent about the dividend exemption. Yes, double-taxation is bad. But by eliminating a tax on dividends we are creating a whole new loophole in tax law, encouraging all kinds of "structured products" (my business) that add no economic value but turn various kinds of income into dividends. If you want to fix corporate governance, eliminate the corporate income tax altogether and tax capital gains as ordinary income. That would make the tax code simpler and more efficient, eliminate double taxation, eliminate the incentive for companies to take on too much debt, and eliminate the incentive to retain income that makes for so many shenanigans. Why didn't Bush propose that? Politics, I suspect. Eliminating the corporate income tax would look even more like a sop to Bush's friends than elimination of the tax on dividends. And that's a shame, because politics costs money - always.
And I'm not convinced that the Bush strategy on taxes is the best politics in the long term. If we're debating which kinds of tax complification is best for the economy, you'll win some, you'll lose some. But I have a feeling that making the code simpler and fairer is a more durable winning strategy. That's the spirit of 1986, and I don't believe it's all gone, not yet.