Friday, January 10, 2003
John Derbyshire seems to agree with me re: tax cut. Meanwhile, Ryan Lizza at TNR thinks the plan is all about goosing the stock market in time for the 2004 elections. And Ramesh Ponnuru thinks it's a good political move because it will create broad dividend-clipping constituency who will fight tooth and nail against any restoration of the tax.
Hate to rain on the Bush/Ponnuru parade, but (1) pushing money around from one favored category to another isn't going to push the market up long-term (and who really knows what happens short-term); (2) cobbling together constituencies dependent on one or another government tax-break is about as winning a strategy as cobbling together constituencies dependent on one or another government hand-out. This is how the other guys play the game, fellahs.
Look, I agree that double-taxation is bad. That's why I think we should junk the corporate income tax entirely, and tax capital gains and dividends as ordinary income. But making dividends exempt from taxation doesn't just eliminate double taxation; it gives investors an incentive to prefer equity to debt. Now, maybe this net-net perfectly offsets the corporate preference for debt over equity - but maybe not. It's so hard to calibrate one distortion to perfectly offset another. If we go too far the other way, we'll push too much money out of the corporate debt markets and into the stock market. Which, in turn, will create its own economic problems. And incidentally, making dividends exempt from taxation while continuing to tax capital gains also creates distortions in favor of paying out large dividends and retaining no income. That's the opposite of the way the distortions work now - but why is one distortion better than another? Search me. The only reason I can think of is political: the last round of scandals involved companies manipulating their earnings, and high dividend payouts make that tougher. But I have no doubt that new scandals are awaiting around the corner from tax-free dividends. The structured products guys are already gearing up to structure the products that will be the basis for those scandals. Believe me: I know.
Could Bush's plan goose the stock market short term? Sure, it could. Stock guys are manic-depressives; they'll jump on any reason to rally, whether it makes long-term sense or no. But that's not how we're supposed to be playing the game. We're supposed to care about those long-term wealth-creation incentives that are the substance of the first half of Ponnuru's piece. I can't convince myself that eliminating the tax on dividends is the best way, or even a good way to get there.