RE: Neutral taxation?/was Re: questions about dividend tax cut
Dan, even more than direct/indirect, you need to specify what is neutral. Given democracy, one (adult) person, one vote, a strong case can be made for a neutral poll tax. Of course it is not progressive like most income taxes. Flat rate taxes, sales/VAT taxes, even land taxes, affect some more than others. My own preferences are more towards a flat(er) tax, with a large (poverty level) deduction, and rates tending down (to zero?); a land tax, split between local, state, and federal (1/3 each? 50-25-25?); and ever increasing taxes on pollution. I am constantly annoyed at the greens wanting huge regulation but unwilling to support higher pollution taxes. Um, to get rid of the last 5% of income taxes, I'd even support deficit spending printing money (inflation, another fairly neutral tax, of about 2-3% per year). But of the course the MAIN problem is on the benfit side -- so many voters want, claim, demand, and only-vote-for those politicos who offer their favorite benefits. The demand for benefits drives the demand for tax revenue. And the coming (2020) Social Security baby boomer elephant-sized funding gap is gonna be a HUGE increase in benefit demand. Europe is even more vulnerable than the US or the UK. Sigh. What is to be done? (someone said that... I know, what's is name the commie!) Tom Grey But this assumes that taxes can be neutral. I would tend to agree with Larry Sechrest here -- viz., there are no neutral taxes. (Sechrest's position is laid out in his Rand, Anarchy, and Taxes in _The Journal of Ayn Rand Studies_ 1(2).) Do any of you agree? Cheers! Dan http://uweb.superlink.net/neptune/
RE: Neutral taxation?/was Re: questions about dividend tax cut
To Tom Grey (and others) 2 points: 1: why not retain land tax as a local tax, as this would ensure tax- payers the possibility of voting with ther feet, end thus ensure some degree of fiscal competition between neigbouring counties / municipalities? 2: I believe Austrain Economic Theory does noit regard inflation as a neutral tax, as one of it's main beliefs is that the earlier you get your hands on new money, the more you benefit - and vice-versa. I don't know whether this holds true for constant (that is: expected) inflation as you are descibing as well - anyone? Jacob Braestrup Danish Taxpayers Association Dan, even more than direct/indirect, you need to specify what is neutral. Given democracy, one (adult) person, one vote, a strong case can be made for a neutral poll tax. Of course it is not progressive like most income taxes. Flat rate taxes, sales/VAT taxes, even land taxes, affect some more than others. My own preferences are more towards a flat(er) tax, with a large (poverty level) deduction, and rates tending down (to zero?); a land tax, split between local, state, and federal (1/3 each? 50-25-25?); and ever increasing taxes on pollution. I am constantly annoyed at the greens wanting huge regulation but unwilling to support higher pollution taxes. Um, to get rid of the last 5% of income taxes, I'd even support deficit spending printing money (inflation, another fairly neutral tax, of about 2-3% per year). But of the course the MAIN problem is on the benfit side -- so many voters want, claim, demand, and only-vote-for those politicos who offer their favorite benefits. The demand for benefits drives the demand for tax revenue. And the coming (2020) Social Security baby boomer elephant-sized funding gap is gonna be a HUGE increase in benefit demand. Europe is even more vulnerable than the US or the UK. Sigh. What is to be done? (someone said that... I know, what's is name the commie!) Tom Grey But this assumes that taxes can be neutral. I would tend to agree with Larry Sechrest here -- viz., there are no neutral taxes. (Sechrest's position is laid out in his Rand, Anarchy, and Taxes in _The Journal of Ayn Rand Studies_ 1(2).) Do any of you agree? Cheers! Dan http://uweb.superlink.net/neptune/ -- NeoMail - Webmail
Re: questions about dividend tax cut
Fred Foldvary wrote: If there are zero taxes on corporate profits, but taxes on dividends, then the incentive is to retain earnings rather than pay dividends, and the shareholders get the profits tax-free until the shares are sold for capital gains. The shares might never be sold, but passed on to heirs. For tax fairness, given the income tax, all income should be taxed equally, and for efficiency, the tax system should minimize the impact on decisions. So it is better to tax corporate profits and then credit that against tax liabilities of dividend income. To achieve neutrality, unrealized gains should be taxed annually, and then we can forget about capital gains. That being said, the income tax is inherently unjust, complex, and burdensome, but that is another story. I disagree (not with your last point of course ¡V and it is partly because I agree with you on this point, I disagree with you on the rest) Below is an extract (rather lengthy, sorry) from my publication Simpler Taxes - A guide to the simplification of the british tax system (the whole publication may be downloaded free of charge here: http://www.adamsmith.org/policy/publications/pdf-files/simpler- taxes.pdf) ¡§The first problem when taxing personal income is determining what it is, most importantly distinguishing it from capital gains. Some will find such a distinction impossible and even unwanted, believing that any capital gain should be taxed as income. To those it could be argued that: h There is a big difference between income and capital gains, and h While the former is easily identified and taxed, the latter is not. The difference between income and capital gains is, in theory, clear enough: an income is a certain payment at a certain date, subject to a formal or informal contract, while a capital gain is uncertain and not guaranteed to be positive. Thus work wages or interests on bank deposits are clearly incomes, while increases in house prices or shares are clearly capital gains. The former are certain and guarantied by contracts, while the latter are uncertain and could just as well be negative. Dr. Barry Bracewell-Milnes described the difference thus : ¡§It is rather like the difference between night and day. Certainly there is a dusky time in the evening where it is difficult to say confidently whether night has fallen or not. But at most moments within any 24-hour period, everyone is perfectly well aware whether it is night or day¡K If the otherwise insignificant boundary becomes important in some context, then we set an arbitrary cut-off point ¡V as we do with ¡§lighting up time¡¨, a convention to prevent people driving unsafely while the night is still deepening¡¨ But what about these borderline cases? Clearly the problem of separating income from capital gains, and the possibility of transforming the first to the latter, have been the main driving forces behind treating capital gains as personal incomes subject to taxation. The problem overlooked by those who find the border between the two hard to police is, however, that the inclusion of capital gains as an income opens up a host of other boundaries to be policed. To what extent should capital losses be deductible, if at all? Should all capital losses in one¡¦s entire lifetime be deductible from any capital gains, or only those from within the same year as any gains? What about inflation in that period? To what extent should running investments in physical capital, or the opposite as the case might be, be included in calculations of capital gains? If a house is sold after 20 years of decay for the same price as it was bought, indexed for inflation, then surely some capital gain must have been materialised along the way by the owner. Should this gain be taxed? How is it calculated? If the same house is sold for twice the original price after being vigorously kept and refurbished, should this investment not be deductible? What if the bottom has gone out of the housing market and the house, despite investments, is still only worth the original price? Should the investments still be deductible? The list of questions is never-ending, and I shall not attempt to answer any of them. Neither shall I attempt to answer the other question faced when including capital gains as taxable incomes: which capital gains should be taxed and which should not. If policing the boundary between income and capital gains is difficult, this new boundary is even more so. As interns or trainees, many young people work for low wages in the anticipation that their value as workers will rise from the experience, and other young people spend years in universities hoping the same. Clearly these increases in ¡§personal¡¨ values are capital gains, but neither are taxed. Only the part of personal values actually materialised as income (if any) is being taxed. The capital gain itself is not, and
RE: Neutral taxation?/was Re: questions about dividend tax cut
I would tend to agree with Larry Sechrest here -- viz., there are no neutral taxes. (Sechrest's position is laid out in his Rand, Anarchy, and Taxes in _The Journal of Ayn Rand Studies_ 1(2).) Do any of you agree? I suppose there *could* be a neutral tax, but what would be the point? It would be something like taking five dollars from everyone and giving them back five dollars worth of 'services'. Hmm, I guess that's truly not possible, though. Yes, I agree :) Susan Hogarth Triangle Beagle Rescue of NC www.tribeagles.org [EMAIL PROTECTED]
Re: questions about dividend tax cut
--- Jacob W Braestrup [EMAIL PROTECTED] wrote: an income is a certain payment at a certain date, subject to a formal or informal contract, That is income from an accounting view, but not from the economic perspective. Economic income has no regard for contracts. In economics, income equals consumption plus the change in net worth during some time. while a capital gain is uncertain and not guaranteed to be positive. The ex-ante uncertainty is irrelevant. Dividends are also uncertain ex-ante. For income, we take some time period, such as a year, and calculate the change in actual net worth. If the change in net worth is negative, it gets subtracted from consumption. It is possible for income to be negative. Fred Foldvary = [EMAIL PROTECTED]
Re: Neutral taxation?/was Re: questions about dividend tax cut
Dear Tom, I hope I got your definition of neutral right in the last post. As I indicated, I'd support a poll tax (so long as I'm an armchair intellectual and not running for office, which with my abrasive personality would be a joke anyway). I also support a flatter income tax. In fact I'd like to see something along the lines of the Forbes flat tax with a single rate above the exemption. I've got a master's degree in taxation and used to work as a tax practioner, and so saw first-hand some of the heavy cost of complying with the complex income tax. A simpler system would reduce the compliance costs. I don't really want to replace all the tax revenue generated by the current income tax; personally I'd like to see the federal government spend a fifth to a fourth of what it does now. I agree that much of the problem comes on the benefit side, with almost everyone (except Democratic politicians in the federal government--I wonder why they lost the Senate?) supporting some sort of tax cuts but nobody wanting their own benefits cut. I'd love to hear some good (or even some mediocre) suggestions on how to overcome the problem. Under Gramm-Rudman, which lasted basically covered Reagan's second term, discretionary federal non-defense spending grew at its slowest rate since the 1920s, so it may be that the threat of automatic across-the-board cuts have the most success by forcing competing interests to fight with each other rather than cooperate to raise federal spending in the aggregate. It didn't last very long and only happened under the threat of huge deficits and indeed broke down when the automatic cuts got large, so I'm not actually too optimistic about the success of such things. DBL In a message dated 1/16/03 5:20:18 AM, [EMAIL PROTECTED] writes: Dan, even more than direct/indirect, you need to specify what is neutral. Given democracy, one (adult) person, one vote, a strong case can be made for a neutral poll tax. Of course it is not progressive like most income taxes. Flat rate taxes, sales/VAT taxes, even land taxes, affect some more than others. My own preferences are more towards a flat(er) tax, with a large (poverty level) deduction, and rates tending down (to zero?); a land tax, split between local, state, and federal (1/3 each? 50-25-25?); and ever increasing taxes on pollution. I am constantly annoyed at the greens wanting huge regulation but unwilling to support higher pollution taxes. Um, to get rid of the last 5% of income taxes, I'd even support deficit spending printing money (inflation, another fairly neutral tax, of about 2-3% per year). But of the course the MAIN problem is on the benfit side -- so many voters want, claim, demand, and only-vote-for those politicos who offer their favorite benefits. The demand for benefits drives the demand for tax revenue. And the coming (2020) Social Security baby boomer elephant-sized funding gap is gonna be a HUGE increase in benefit demand. Europe is even more vulnerable than the US or the UK. Sigh. What is to be done? (someone said that... I know, what's is name the commie!) Tom Grey
Re: Neutral taxation?/was Re: questions about dividend tax cut
In a message dated 1/16/03 11:57:03 AM, [EMAIL PROTECTED] writes: AdmrlLocke wrote: The farmer felt no compunction at all about complaining that while under the income tax system he pays no tax, under a sales tax he'd pay a hefty tax. He pays nothing and he thinks he's entitled to pay nothing while everyone else pays something.) This kind of rhetoric never seizes to amaze me. Why do people get away with it? I'm tempted to say that it's because America is dominated by WASP culture, and WASP culture promotes polite and confict-aversion over confrontational truth. I don't really think, however, that that fully explains why such people don't get confronted more, although it might explain much of that particular story, since I was sitting in a WASPy country club in small-town Iowa. :) I think that in America certain groups of people have gotten benefits because, deservedly so or not, many other Americans believed that the beneficiaries deserved the benefits. Much of the Great Society--occasional liberal protestations to the contrary notwithstanding--appealed to urban/suburban Northern white middle-income guilt over the treatment of blacks in America, particularly (but not exclusively) during slavery. These voters believed (rightfully so) that blacks had been oppressed (slavery, Jim Crow, etc.) and that therefore someone should pay them, or their descendants, something (a rather tenuous conclusion, I'll admit, and the one behind the 'reparations' movement these days). These voters also saw having the government make these payments as an easy, cost-free way (a decidedly false assumption) to expiate their guilt for evils perpetrated by other people. Until the Great Society's heavy costs (inflation, welfare-dependence, destruction of black neighborhoods and families) started to appear clearly in the 1970s, very few of these voters felt any desire to criticize the programs, or the recipients who developed an entitlement mentality, or feared to express such criticizms for fear of being branded racist, as the Democrats routinely do and have done since the 1960s. In the farmer's case, there's a centuries'-long American love-affair with rurality and the famer. We start with the early colonial stories of America as a great garden, the Jeffersonian ideal of the sturdy yeoman farming his land, the American notion of the farmer as the salt of the earth, the non-economic notion that the farmer feeds us (as though out of the goodness of his heart for us poor, starving urban dwellers). Indeed a hostility toward the sick, polluted, direct city and preference for the clean, growing countryside goes back to pre-colonial English (and Continental) roots. Farmers in America tried for decades starting in the late 19th century to get various types of government benefits, but only when their relative numbers had declined to less than half the population could they actually manage to start squeezing out some small benefits in the 1920s. Now that less than half of a percent of the US population engages in full-time farming, taxpayers can afford to exempt farmers entirely from federal income taxation, pay then individually tens and sometimes hundreds of thousands of dollars, and yet barely notice. For decades it hardly seemed worth the effort to debunk the noble farming myth in order to cut agricultural price subsidies, although in the mid-1990s the Democrats' allies in the media made cutting ag subsidies the key test of whether Republians were really serious about cutting entitlements. (Note: Republicans did phase out the notorious ag price supports [though not all federal ag subsidies] but got not credit from the news media, whose members conveniently forgot they'd set up ag subsidies as the key test). Civil War veterans, however, stand out as the first group to create a sense among the voters that they deserved to feed at the federal trough, and for the next half-century or so got increasingly large and wide benefits. Eventually Congress passed what some have called a Sneeze Clause or something like that: if a Civil War veteran ever sneezed in your direction you got veteran benefits. I understand that veterans today still get substantial, wide-ranging federal benefits, thought I'm not at all sure that having a separate, completely-socialized medical system doesn't hurt them much more than it helps. Here in Denmark, we often hear similar rhetoric on welfare benefits. If someone in the media is advocating a reduction (or more likely, advocating a lower increase) in welfare benefits, the interviewer will gladly turn to someone, who will say: “I actually receive welfare benefits, and I think they are too low”. That’s it – end of discussion!! The general feeling is: “Well, this guy actually receives benefits, so he’s gotta be the expert, right?” – “on the other hand, the idiot who proposed the cut (lower increase) doesn’t receive
Re: questions about dividend tax cut
On Mon, Jan 13, 2003 at 01:44:59PM -0800, Fred Foldvary wrote: There is also a supply-side effect from cutting the marginal tax rate, from less uncertainty about the company as it shifts to less debt and more equity, as well as more investor confidence when the profits are sent to the shareholders rather than retained by possibly theiving executives. Any idea why the dividend tax, instead of the corporate income tax, is being proposed for a cut? If we want to end double taxation of dividends, it makes more sense to me to eliminate the corporate income tax instead of the dividend tax. My guess is politics. Cut taxes on Corporations! does not sound like a winning issues, given the level of economic literacy of the news media (as Bill pointed out).
Re: questions about dividend tax cut
why the dividend tax, instead of the corporate income tax, is being proposed for a cut? If there are zero taxes on corporate profits, but taxes on dividends, then the incentive is to retain earnings rather than pay dividends, and the shareholders get the profits tax-free until the shares are sold for capital gains. The shares might never be sold, but passed on to heirs. For tax fairness, given the income tax, all income should be taxed equally, and for efficiency, the tax system should minimize the impact on decisions. So it is better to tax corporate profits and then credit that against tax liabilities of dividend income. To achieve neutrality, unrealized gains should be taxed annually, and then we can forget about capital gains. That being said, the income tax is inherently unjust, complex, and burdensome, but that is another story. Fred Foldvary = [EMAIL PROTECTED]
Neutral taxation?/was Re: questions about dividend tax cut
On Wednesday, January 15, 2003 7:11 PM Fred Foldvary [EMAIL PROTECTED] wrote: To achieve neutrality, unrealized gains should be taxed annually, and then we can forget about capital gains. But this assumes that taxes can be neutral. I would tend to agree with Larry Sechrest here -- viz., there are no neutral taxes. (Sechrest's position is laid out in his Rand, Anarchy, and Taxes in _The Journal of Ayn Rand Studies_ 1(2).) Do any of you agree? Cheers! Dan http://uweb.superlink.net/neptune/
Re: Neutral taxation?/was Re: questions about dividend tax cut
Dear Dan, I actually do agree, which is part of why when my conservative friends would support a national sales tax instead of an income tax as though a national sales tax were a panacea I'd just shake my head and tell them, there's no such thing as an unburdensome tax. There's no unburdensome way for the federal government to confiscate a third of national income. Some taxes bear more heavily on some people than others, so shifting between them may change how much of the burden a particular individual shares. People naturally tend (and I do say tend) to support moving to a sytem that shifts some of the burden they bear to somebody else, or on keeping the status quo if the current system rests relatively little burden on themselves. (As a case in point, a farmer showed up to listent to Indiana Senator Dick Lugar, campaigning for president in Iowa, speak about replacing the income tax with a sales tax. The farmer felt no compunction at all about complaining that while under the income tax system he pays no tax, under a sales tax he'd pay a hefty tax. He pays nothing and he thinks he's entitled to pay nothing while everyone else pays something.) I can't imagine any tax that would be neutral, but some might be less injurious to economic growth than others. I'm not persuaded, however, that taxing consumption more heavily than income will discourage economic growth any less than taxing income more heavily than consumption, since the ultimate goal of producing income is to consume it anyway. In a message dated 1/15/03 10:51:58 PM, [EMAIL PROTECTED] writes: On Wednesday, January 15, 2003 7:11 PM Fred Foldvary [EMAIL PROTECTED] wrote: To achieve neutrality, unrealized gains should be taxed annually, and then we can forget about capital gains. But this assumes that taxes can be neutral. I would tend to agree with Larry Sechrest here -- viz., there are no neutral taxes. (Sechrest's position is laid out in his Rand, Anarchy, and Taxes in _The Journal of Ayn Rand Studies_ 1(2).) Do any of you agree? Cheers! Dan
Cutting Corporate Tax Instead of Tax on Dividends (Was Re: questions about dividend tax cut
Originally the federal income tax law sought to tax income closest to the source, presumably because the farther from the source, the more easily income might escape detection and therefore taxation. In the hearings over the 1913 income tax law one member of Congress suggested simply taxing each shareholder on his pro rata share of corporate income, but got shot down. As far as eliminating the corporate income tax today, look at all the furor the advocates of punitive taxation (notice I didn't say the advocates of statism ) have raised over Bush's proposal to cut taxation of dividends. Can you imagine the holy hysteria they'd raise over cutting the corporate tax instead? It seems likely that even more people would agree that such a cut in tax constituted a tax cut for the wealthy since in their minds it would be going to corporations instead of people. David Levenstam In a message dated 1/13/03 7:50:22 PM, [EMAIL PROTECTED] writes: On Mon, Jan 13, 2003 at 01:44:59PM -0800, Fred Foldvary wrote: There is also a supply-side effect from cutting the marginal tax rate, from less uncertainty about the company as it shifts to less debt and more equity, as well as more investor confidence when the profits are sent to the shareholders rather than retained by possibly theiving executives. Any idea why the dividend tax, instead of the corporate income tax, is being proposed for a cut? If we want to end double taxation of dividends, it makes more sense to me to eliminate the corporate income tax instead of the dividend tax. Cutting taxes on dividends while keeping taxes on capital gains seems to provide a perverse incentive for companies to retain as little profits as possible, leading to a higher rate of corporate bankruptcy in the future. I predict we'll also see companies issue new stock and then immediately distribute the capital as dividends in order to dilute their stock value - the opposite of the stock buy-back programs that companies undertake today to avoid paying dividends.
Taxes direct and indirect, was: Dividend Tax cut
In the 1796 Hylton case the Supreme Court accepted Hamilton's view that the only direct taxes are the poll tax (a tax on heads, not on voting), and taxes on real property and slaves constituted direct taxes. Taxes on other items were indirect. (They didn't use the current distinction that economists often use of direct taxes refering to taxes which the taxpayer pays directly to the government.) David Levensam Hamilton was incorrect, as was the Supreme Court. There is no logical reason why if a tax on a slave is direct, a tax on a horse is not also direct. If a tax on a house is direct, why not on a carriage? It seems to me that the Supreme Court reasoned illogically that since the 1790s tax on carriages was not proportioned by population, it was thus indirect. I can see the 18th century argument that only a tax on land is direct, as all other taxes ultimately get shifted to rent (cf. John Locke on taxation). But once a tax on slaves and on buildings is designed as direct, then so too must be taxes on a horse and carriage or any other property. Fred Foldvary = [EMAIL PROTECTED]
questions about dividend tax cut
Howdy, I have some questions about the dividend tax cut (elimination). Let's suppose that the elimination of taxes on dividend income to stock holders is instituded and it is a complete suprise to the public, so that no adjustment can take place either in expectation of it being passed, or after it is passed but before it takes effect. Let's also assume that growth opportunities are not an issue, so the price is wholly dependent on dividends. If the price of a stock is the PV of the dividend stream into the future, then should there merely be a one time jump in the value of a stock as a result? More concretely, if the tax rate was T, then a dividend was worth (1-T)D, where D is the amount of the dividend. And the present value of the perpetuity, i.e. the dividend stream, would be (1-T)D/r, where r is the interest rate (right?). So the price of the of the stock would be P=(1-T)D/r. Now the suprise tax cut comes into effect. The price of the stock should jump to P'=(1-0)D/r=D/r. Thus, there should be merely a one off jump in the share price by the amount P'-P=[D/r]-[(1-T)D/r]=(D+T)/r. Is this correct? Should the tax rate on dividend income be included in the pricing of the shares, and should we see a jump in prices? I suppose that intstead of T:=tax rate on dividends, I could have used T:=Td-To, where Td is the tax rate on dividends and To is the tax rate on some other investment. Would that be correct? Okay. Assuming the above is correct, then the rate of return on a stock should increase from (1-T)D/P to D/P'. The increase in the rate of return then is =[(1-T)D/P]-[D/P'] =[D/(D/r)]-[(1-T)D/{(1-T)D/r}] =r-r =0. So the increase in the rate of return on stocks should be equal to zero. Stocks are no more profitable after the tax cut than before--it shouldn't help the market at all. If dividend income tax is not priced into the stock, then again, there should be no change in the profitability of stocks, because P=P' and 1-0=1. The same should be true if T:=Td-To, correct? Is my conclusion that the dividend tax cut should have no impact on the rate of return of stocks correct? Is the only effect of such a tax cut to provide a once off permanent increase in the wealth of stock holders as the price jumps from P to P', thus stimulating the economy solely through the wealth effect of that change? If this conclusion is correct, how will loosening the two assumptions, first that the cut is publicly known before it takes effect and second that the present value of growth opportunities are taken into account in share pricing, affect the conclusion? Will loosening the second assumption change corporate behavior viz. investing in growth vs. paying dividends? What should we expect that change to be? Has this question already been asked on this list and I missed it? Curiously yours, jsh __ Do you Yahoo!? Yahoo! Mail Plus - Powerful. Affordable. Sign up now. http://mailplus.yahoo.com
Re: questions about dividend tax cut
--- john hull [EMAIL PROTECTED] wrote: If the price of a stock is the PV of the dividend stream into the future, then should there merely be a one time jump in the value of a stock as a result? No. There is also a supply-side effect from cutting the marginal tax rate, from less uncertainty about the company as it shifts to less debt and more equity, as well as more investor confidence when the profits are sent to the shareholders rather than retained by possibly theiving executives. Fred Foldvary = [EMAIL PROTECTED]
Re: questions about dividend tax cut
--- john hull [EMAIL PROTECTED] wrote: Now the suprise tax cut comes into effect. The price of the stock should jump to P'=(1-0)D/r=D/r. Thus, there should be merely a one off jump in the share price by the amount P'-P=[D/r]-[(1-T)D/r]=(D+T)/r. Mistake #1, (D+T)/r is greater than the price itself. I don't think the rest depends on that. Back to the drawing board for that part. Sorry about that. -jsh __ Do you Yahoo!? Yahoo! Mail Plus - Powerful. Affordable. Sign up now. http://mailplus.yahoo.com
Re: questions about dividend tax cut
On Mon, Jan 13, 2003 at 01:44:59PM -0800, Fred Foldvary wrote: There is also a supply-side effect from cutting the marginal tax rate, from less uncertainty about the company as it shifts to less debt and more equity, as well as more investor confidence when the profits are sent to the shareholders rather than retained by possibly theiving executives. Any idea why the dividend tax, instead of the corporate income tax, is being proposed for a cut? If we want to end double taxation of dividends, it makes more sense to me to eliminate the corporate income tax instead of the dividend tax. Cutting taxes on dividends while keeping taxes on capital gains seems to provide a perverse incentive for companies to retain as little profits as possible, leading to a higher rate of corporate bankruptcy in the future. I predict we'll also see companies issue new stock and then immediately distribute the capital as dividends in order to dilute their stock value - the opposite of the stock buy-back programs that companies undertake today to avoid paying dividends.
Re: questions about dividend tax cut
Would any company give dividend then? Wei Dai [EMAIL PROTECTED] To: [EMAIL PROTECTED] om cc: Sent by: Subject: Re: questions about dividend tax cut owner-ARMCHAIR@g mu.edu 14/01/2003 08:40 Please respond to ARMCHAIR On Mon, Jan 13, 2003 at 01:44:59PM -0800, Fred Foldvary wrote: There is also a supply-side effect from cutting the marginal tax rate, from less uncertainty about the company as it shifts to less debt and more equity, as well as more investor confidence when the profits are sent to the shareholders rather than retained by possibly theiving executives. Any idea why the dividend tax, instead of the corporate income tax, is being proposed for a cut? If we want to end double taxation of dividends, it makes more sense to me to eliminate the corporate income tax instead of the dividend tax. Cutting taxes on dividends while keeping taxes on capital gains seems to provide a perverse incentive for companies to retain as little profits as possible, leading to a higher rate of corporate bankruptcy in the future. I predict we'll also see companies issue new stock and then immediately distribute the capital as dividends in order to dilute their stock value - the opposite of the stock buy-back programs that companies undertake today to avoid paying dividends.
Re: questions about dividend tax cut
--- Wei Dai [EMAIL PROTECTED] wrote: Cutting taxes on dividends while keeping taxes on capital gains seems to provide a perverse incentive for companies to retain as little profits as possible, leading to a higher rate of corporate bankruptcy in the future. My recollection from reading about it is that the proposal does indeed cut the tax on capital gains to the extent it is due to retained earnings, as the attempt is neutrality with repect to paying dividends or not. However, to truly do capital gains right, it needs to be indexed for inflation. Fred Foldvary = [EMAIL PROTECTED]
Re: Dividend Tax cut
On Sunday, January 12, 2003 2:01 AM David Levensam [EMAIL PROTECTED] wrote: Fred Foldvary wrote: Too much financial capital, i.e. money, can cause a recession, by artifically lowering the interest rate, inducing excessive investment of those capital goods for which only a low rate of interest is profitable. Since intended consumption has not changed, consumers compete with investors for goods, driving up prices. The capital goods turn out to be unprofitable investments, and the diminution of investment leads to a downturn. This is standard Austrian business-cycle theory, which is why I said that too much borrowed capital can cause a recession. It also works under standard monetarist theory, with too much money driving up the general level of prices, causing a false boom, which then collapses into recession after peopel figure out that only nominal, not real, aggregate demand has risen. Actually, Austrian Business Cycle Theory (ABC) is a bit more sophisticated than that. It's closer to what Fred says above. It's not too much capital, but distortions in capital. To Austrians, capital is heterogenous not homogeneous -- not an undifferentiated blob of stuff, but a complex set. Looked at this way, certain sets of capital work better together than others. Add time into the mix and we have certain sets of capital working better than others to ultimately produce consumer goods and services. In ABC, the interest rate affects which capital structures will be chosen. In general, a lower interest rate allows for lengthier production schedules while a higher one makes for lower ones. In other words, lower interest rates allow for longer ranged planning and higher ones disallow that. The problem in ABC, of course, is not merely setting the interest rate -- else then why not have the government come in and mandate a zero or negative rate so we get increasing intensification of capital -- but having a sustainable interest rate, viz., one matching investment and saving decisions. Lowering the rate below the stock of savings -- below the natural rate creates an inflationary situation that is unsupportable in the long run -- leading to business cycles. (A higher than natural rate leads to a deflationary situation which involves a deintensification of capital.) If this were the whole story, it would be bad enough, but since capital is hetergeneous in more than just the temporal sense, the path inflation takes through the economy varies. So one can't necessarily predict ex ante how an inflationary boom will proceed. Generally, whoever gets the expanded credit first will get the most benefits from it and prices will rise in that industry first. For example, imagine an economy with 10 different sectors -- A, B, C, D, etc. Let's say industry A gets the influx of new credit first and that it buys directly from industry B while B buys directly from C and so on. Credit expansion will benefit A first, allowing it to buy more from B, driving up prices in B and, after a time lag, investment in B. B will buy from C, likewise driving up prices and investment after a time lag. This distorts the whole price structure because of the time/information lag. Since we're presuming the expansion is unsustainable, eventually there has to be a correction, but this does not necessarily recover all losses. I.e., it doesn't reverse all the damage. This scenario might be playing out now in the homebuilding industry. Low interest rates have given incentives for people to buy bigger mortgages spurring lots of new, expensive homebuilding. If the real estate boom lasts long enough to build the homes, the initial homebuilders will make a profit, but imagine a few months after that the market collapses. Later building projects will fail and also home buyers who planned to sell later will lose out and if this brings about another recession, some of them might not be able to meet the mortgage payments. Etc. There can be too much real capital invested in particular types of capital goods. Sure, because people aren't perfect prognosticators. If they were, there would be no economic problems period and no need to worry about this stuff or anything for that matter.:) To cause a recession, however, wouldn't such misinvestment have to be systemic? What would cause such systemic misinvestment--everyone making large mistakes at the same time--beyond government manipulation of the money supply? Government manipulation of the money supply -- through control of interest rates as well as reserve requirements, selling bonds, and even deficit spending (since that impacts market rates to a big extent because the government is a big debtor in most extant economies) -- is a large part of the story according to ABC. Malinvestments per ABC happen in basically the above fashion. Government interference in the money supply allows for widespread distortions in the capital structure and in planning for individuals
Dividend Tax cut
I was wondering what you all's opinions are on the elimination of the dividend tax President Bush is endorsing. In my opinion the recent recession has been caused by too much freely available capital. Tech and growing companies have always argued that because of double taxation it made more sense for a company to re-invest its profits instead of giving them to share holders. If there was no dividend tax durining the 90's we probably would not have had as much growth but we also would not have had such a sever recession either. Is this reasonable? --- 'LinkHype' Links to the good stuff.- http://www.linkhype.com 'Intelliforge' Economics and Web Mining - http://www.intelliforge.com
Re: Dividend Tax cut
I don't see how too much capital could cause a recession, or indeed how it's possible to have too much capital. Do you mean too much credit, too much borrowed capital? The notion of too much borrowed capital fits with both Austrian and monetarist theories of recession. Since I first studied taxs as an undergraduate accounting major, I've opposed the double-taxation of dividends that the federal government imposes under the federal income tax. I've never heard a good reason advanced for taxing someone's income twice, or, for that matter, even much of a bad reason. If you read the debates in Congress over passage of the first federal income tax law under the 16th Amendment (which incidentally wasn't the first constitutional federal income tax, contrary to popular view) you'll see that they planned to tax income closest to the source, which is why they imposed an income tax at the corporate level. That also taxed the income regardless of whether the corporation actually paid it to the shareholders or not. They didn't plan to tax dividends, and indeed under the first law they passed didn't they did not impose the normal income tax on dividends. They did impose the high-income surtax on dividends, which might be regarded as double-taxation, but that's not how they saw it. Rather, they placed the normal tax directly on the corporate income, and the surtax only on aggregate individual dividends above a very large exemption, which they saw essentially as simply a higher bracket on corporate income, but only for wealthier individuals (if I'm explaning it at all lucidly). During World War I, however, Congress basically taxed everything in sight--and a good deal hidden from sight as well. :) Congress applied the normal tax to dividends during its taxing binge and, well, just never let go. Since then dividends have suffered double-taxation in America. Of course the majority of Americans didn't pay any income taxes until World War II, but a substantial fraction did pay throughout the 1920s. David Levenstam In a message dated 1/11/03 8:12:18 AM, [EMAIL PROTECTED] writes: I was wondering what you all's opinions are on the elimination of the dividend tax President Bush is endorsing. In my opinion the recent recession has been caused by too much freely available capital. Tech and growing companies have always argued that because of double taxation it made more sense for a company to re-invest its profits instead of giving them to share holders. If there was no dividend tax durining the 90's we probably would not have had as much growth but we also would not have had such a sever recession either. Is this reasonable?
Re: Dividend Tax cut
--- Tommie M. Jones [EMAIL PROTECTED] wrote: I was wondering what you all's opinions are on the elimination of the dividend tax President Bush is endorsing. Given that the rest of the income tax code stays the same, it would be better to have a tax credit for dividends, proportional to the income taxes paid by the corporation. The Bush proposal also eliminates some capital gains that are due to retained earnings, to avoid skewing policy towards paying dividends to reduce the tax. To do it really right, both realized and unrealized gains from shares of stock should be taxed, with a credit for taxes paid at the corporate level. The capital gains tax could then be eliminated. Fred Foldvary = [EMAIL PROTECTED]